Interest Only Mortgages - are you safe?
The Bank of England’s Mark Carney has made warning on numerous occasions about the amount of exposure lending institutions are under. The exposure that comes from unsecured loans has been steadily on the rise, and earlier this month banks and lenders (under instruction from the Bank of England) have been cracking down on the ease by which unsecured loans can be issued. This, as reported by The Telegraph, is manifesting in a rising rejection of unsecured loans such as credit card applications. It has been previously reported that credit cards are becoming more and more reliant upon by less well-off households as they use it more for day to day living.
Similarly the market for secured loans such as mortgages is facing similar tightening from the effects of these new recommendations. New mortgages being accepted are the lowest they have been since January 2015. However it is also because the Financial Conduct Authority recently raised the alarm that the customer base of mortgage borrowers who use interest-only products (about one in five of total mortgage borrowers) may not be able to repay back the capital at maturity.
Interest-only mortgages are mortgages where the repayment only includes the interest on the lending, and not any of the capital. When the mortgage term is up, the capital on the property must be paid back in full. With a chunk of these interest-only mortgage terms expecting to come to maturity soon, and other bulk at 2027 and another at 2032, the FCA is concerned that the capital repayment wont be able to be paid back by some of these borrowers. On instruction from the FCA, banks have been contact these borrowers to discuss options and only a fraction have responded, with a fear being that many borrowers may have their heads in the sand regarding the eventual repayment of the capital, leaving the FCA attempting to contact them themselves.
If you have been recipient of one of these letters, it is in your own benefit to get in contact with either your FCA-qualified lender or broker to work out if or how this affects you.