The Interest-Only Mortgage Gamble

Millions of home owners have been caught out by gambling on an interest-only mortgage.  Many saw this type of loan as a way into a more desirable property or, in the case of many first-time buyers, as a way onto the market.  At the peak of the last property boom, more than 30,000 families per month were taking out interest-only mortgages, many having no investment vehicle to pay off the capital, gambling on the fact that property prices would continue to rise and that the growing equity would help them pay off their loans.

With homes having lost around one fifth of their value in the last two years, an estimated 4.2 homeowners now have to face up to the reality that they will not be able to move for some years to come.  What is particularly galling about this particular course of events is the fact that the banks and building societies knew that around two thirds of the people that they were setting up with this type of mortgage during the boom time of 2006 and 2007, did not have a savings plan to pay off the capital at the end of the loan period.

Interest-only mortgages become popular in the early 1980s, often going hand in hand with an endowment savings plan.  Unfortunately, many of these endowment policies have fallen well short of their expected growth target due to poor performances of shares and other investments, meaning that many homeowners have had to top them up or move their savings to a different investment, such as an ISA or unit trust.

Commenting on the situation, Ed Stansfield from economic forecaster Capital Economics, said: “With prices having fallen as much as they have already, many homeowners will find that they simply won’t be able to move home.  Any equity they did have has gone, because of the fall in property prices.  And having made no effort to repay their mortgage, they may find lenders are reluctant to lend to them again.  They are going to have to wait until house prices climb back to the levels they were in 2007.  We believe that could take many years.”

The advice to home owners who have this type of loan, without a suitable savings vehicle, is simple; switch to a repayment mortgage.  If this is not financially possible the best thing to do is to overpay on the current loan or start some sort of savings plan as soon as possible.  The longer that it is ignored, the bigger the burden will become – it is literally a ticking time bomb.