More than 100,000 interest-only mortgages will reach the end of their term this year, leaving thousands of borrowers in despair.
According to UK Finance, interest-only borrowers owe on average £104,000. Worryingly, data shows that many people have been burying their heads in the sand and around a quarter of borrowers do not have the ability to repay the capital owed.
Ticking time bomb
In 2012, there were over 3 million interest-only loans on lenders’ books, that number has now halved. However, lenders reported that around 300,000 interest-only loans were not redeemed fully on their maturity date.
This issue will continue to escalate over the next 15 years as more interest-only mortgages reach maturity into the 2030s, by which point some properties could be in negative equity.
The Financial Conduct Authority is urging both lenders and borrowers alike to take action sooner rather than later as there will likely be fewer options available to borrowers in the future who have less equity in their properties.
What are your options?
There are several ways that interest-only borrowers can repay the capital they owe including:
- Use money from savings and investments
- Sell your assets to raise the finance you need
- Sell your home and use the equity to downsize
- Depending on your age and income, you could obtain a traditional repayment mortgage and begin repaying the capital owed
However, for many people these options are not viable. Thousands of borrowers are in their 60s, 70s and above and so obtaining a traditional mortgage is out of the question.
What’s more, people are living much longer and are struggling financially to bridge the gap between a pitiful pension and a lack of savings with day-to-day living costs.
However, while many people are cash poor, they have a lot of money tied up in their homes as property prices have increased almost five-fold in the past 25 years.
Of the loans that are maturing this year, borrowers typically have equity of £387,000. As a result, for many interest-only borrowers, equity release is the most suitable option available to them to diffuse the ticking time bomb.
The equity release market has grown fourfold in the last decade and almost £4bn was released from UK property in 2019 alone.
Rapid growth triggered immense competition between lenders which saw the number of product options more than double from 126 to 287, and interest rates plummet to record lows below 3%.
The growing popularity of equity release is owed in part to the waves of interest-only mortgages coming to an end and borrowers who wish to continue living in their home without having to sell up or downsize.
Could equity release be the solution you have been looking for?
Equity release enables homeowners aged 55 and over to unlock cash tied up in their homes. The loan plus interest can be repaid when the property is sold, usually when the borrower moves into long-term care, or when they die.
Equity release is not suitable for everyone and so it is important to seek independent advice to determine whether you are eligible and whether it is the right option for you.
To determine whether you are eligible for equity release;
- Firstly, find out how much your property is worth
- Calculate how much equity you own by taking the value of your home minus any outstanding mortgage and any other loans secured against it – you can use our free calculator here
- Click here to learn more about equity release
- Speak to a qualified equity release advisor at Personal Retirement Planning who will be able to take account of your individual circumstances and let you know quickly whether you qualify for equity release
We look forward to speaking with you!