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Borrowers time bomb waiting to go off!

View profile for Samantha Gilmore
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Hundreds of thousands of homeowners could be at risk of losing their homes by ignoring how they will pay off their mortgage, a regulator has warned.

In a recent article published by the BBC they reported nearly one in five mortgage-holders has an interest-only home loan, meaning they would need savings or other funds to pay a final lump sum.

In general terms there have always been two types of mortgage, capital and interest and interest only.

Capital and Interest is where the borrower pays each month the agreed interest on the loan plus a little of the capital. The idea is that at the end of the term of the mortgage (usually 25 years), the borrower has paid back all the original sum plus related interest.

Whereas interest only mortgages are as stated, the borrower only pays the interest each month and none of the capital. This style of mortgage became popular in the boom of endowment mortgages where each month the borrower paid interest to the lender in addition to paying into an endowment policy. In theory after 25 years the endowment policy was designed to mature after the term sufficiently to pay off the mortgage.

Sadly with ever changing markets and poor returns on investment funds it became apparent that many endowment policies did not have sufficient growth to pay off the mortgage at the end of the term.     

The Financial Conduct Authority (FCA) said that many of these issues would start to peak in the next 10 to 14 years. They added that 1.67 million full interest-only and part-capital repayment mortgages were still outstanding, representing 17.6% of all mortgages in the UK.

The attraction for interest only mortgages increased in recent years due to soaring house prices. Borrowers needed to borrow more, hence lower monthly repayments with interest only mortgages became popular. 

The regulator said that lenders had improved their communications with customers at risk since its initial report on the issue five years ago.

However, there were still concerns that some customers may have been incorrectly reassured about their plans by non-specialist staff.

If you have any concerns about your ability to redeem your mortgage at the end of the term please speak with either your mortgage provider of a quality Independent Financial Advisor (IFA).

This is not legal advice; it is intended to provide information of general interest about current legal issues.