Updated: Fri, 18 Jan 2013 16:15:00 GMT | By Damian Clarkson, MSN Money senior editor

‘Eight in 10’ homeowners with interest-only mortgage not repaying debt

Many homeowners facing mortgage shock when rates rise as they can’t repay what they owe.


Image © Getty

Homeowners are facing a mortgage time bomb as they have no plans to pay off their homes, research has suggested.

There are almost four million UK households with an interest-only mortgage. Yet a survey of more than 7,000 MSN Money users who have such deals found that just two in 10 are actually setting money aside to repay their debt.

A further 22% said they are relying on house prices to rise in order to pay off their mortgage, while the majority – 58% - said they simply do not have enough money to do so.

While a poll of 7,300 interest-only mortgage holders is by no means definitive, the findings are deeply worrying nonetheless. It means many could face the prospect of losing their home when their current rate expires or changes.

Many are getting deeper into debt

MSN Money poll

Some people might wonder why having no plan to pay off your mortgage is such a terrible thing. After all, given the extortionate cost of renting, aren’t interest-only mortgages a cheaper alternative?

While it’s true that the availability of low rate mortgages has made owning cheaper than renting on a month-by-month basis at present, there are many other factors to keep in mind.

For starters, let’s consider the fact that house prices have fallen notably in many areas across the UK. For someone on an interest-only mortgage, this would mean they are getting deeper into debt.

The bulk of interest-only deals were taken out at a time when it looked like prices could only rise, so some homeowners gambled on the fact that they could buy now and let their property earn the capital required to pay it off. For many, that simply hasn’t happened.

An end to ‘reckless’ lending

Secondly, and most importantly, is what happens when their current mortgage deal expires.

You see, a number of banks and building societies have already pulled out of the interest-only mortgage market. What’s more, the financial regulator is clamping down on irresponsible lending and has stated that interest-only deals must only be offered to borrowers who can provide a credible plan to repay the capital.

So when it comes time to remortgage, borrowers could find themselves stuck on their lenders standard variable rate (SVR); facing a dramatic and unaffordable hike in their monthly repayments.

As Jonathan Harris, director of mortgage broker Anderson Harris, points out: "Interest-only should be for people with a genuine strategy for repaying the capital at the end of the term. Historically, these mortgages were often given away to people who were not in this position so for lots of borrowers it will be a ticking time bomb.”

Take action now

If you are an interest-only borrower it’s essential you don’t simply try ignore the problem. Take steps to shore up your finances and free up cash to start tackling your mortgage debt.

Start thinking about how you can cut your monthly outlays while also looking at ways you can boost your income. To get you started, here are some money saving / money making articles that might spark an idea or two.

36Comments
19/01/2013 16:27
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I'm fed up hearing people complain about their mortgage payments, the interest rate has never been so low so if you cant stand a 0.5% rate increase you've obviously bought a house you cant afford
18/01/2013 23:32
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Everything in this country has gone totally t-ts up we are living in a society where only the rich can keep afloat. Because if you are not born into money and not lucky enough to inherit some or win some the likelyhood of you being able to buy your own home is pretty slim. Because lenders arent lending unless you have a brilliant income and at least a 25% deposit which means people have to save but were do they live in the mean time to save money a tent? Rents are so high how the hell can people save its virtuallly impossible.

In 1985 I lived in the north west and  worked my **** off so that on my 18th birthday I could by a house. I managed to saved £2,500 for a deposit on a 3 bedroom semi detached house  with front and back garden and driveway in a sought after area near shools and shops and 10 mins from the beach which cost me the grand sum of  £18,500. My wages at the time were around  between  £150 and £200 a week net.

 

Compare that to now the very same house is on the market for £189,000 a 25% deposit would be £47,250. Now how many people can afford to save enough to put down a deposit of that size? and how long would it take?on an average wage of £200 £250 a week net ?

 

This just goes to show how much the cost of living has gone totally out of sync.

 

The government says tighten your belts, if I tighten mine anymore I am going to strangle my intestines. How can people save money when everything is so expensive and prices of utilities keep going up, petrol, car tax, council tax is outragous, buisness council tax even worse you dont even get your bins emptied these days you got to pay extra.

 

I had the unfortunate luck of buying a second house in the nasty 90's when interest rates hit their peak an I stupidly and nievly handed in the keys and walked away. there fore ended up with an interest only mortgage with lenders who are basically ruthless, who are supposedly regulated by the FSA who are totally useless and the FSO who do not use their powers to stop them ripping people off. Believe it or not (and I have proof ) from 2006 onwards certain sub prime mortgage lenders connected to the Lehman brothers unlawfully repossessed more than 48,000 homes. The courts had the power to intervene but judges just sat back and let them make innocent people homeless and they are still doing it today. The government knows about this, they have debated it in parliament promising to act but it was all talk they still sit back too and do nothing. If you dont believe me read the articles on the SHELTER SITE it will be an eye opener. The mail online has done articles on sub prime repossessions read those! there is even a dedicated website to help victims of one sub prime lender and its servicer acendenactiongroup. That site has so much information you wouldnt believe. but the government keeps all this information under wraps and the media are scared to bring it to the public. I wonder why??? Because the lenders and the government are in it together they are all liars and they are all corrupt.

And if your wondering why there is not affordable housing google (how to avoid section 103 agreement ) that should enlighten you.

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Well even more work for me!  I've dealt with many clients in my role as a Housing Options Officer and in my experience those clientel with Interest Only mortgages have absolutely no understanding of this financial product.  Whilst some, when asked how they will settle their owing mortgage will answer that they will sell their home for profit, none appear to have considered the fact that this will leave them with no where to live!!  It's not just the banks with their irresponsible lending at fault, it is also the government who have allowed back street lenders (who are no more than loan sharks) into the money markets and thus the banks that have backed businesses such as Ocean Finance  into providing financial services including Mortgages whereby no Valid checks are done of the borrowers or their ability to repay debts.
18/01/2013 18:07
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If the prcentages are representitive of the total then this is yet more evidence of a coming reduction in house prices.
19/01/2013 20:16
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Not "homeowners" but debt owners.  If I make a risky "investment" and I lose, no-one will care, it's just tough.  Buying a house you can't afford on the blind hope that "prices always go up" is reckless and foolish.  Banks were all to happy to boost their fantasy books by accepting liar loans and creating the bubble.  Now we have transferred all this unpayable debt to the State,, so we are all paying the price.  The sooner interest rates go up and property prices become affordable, the better off we will all be (apart from the fools that got us here in the first place).

18/01/2013 20:09
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and at the end of the day.. if people are on low wages, how else can they afford the capital investment. So they cant win. Rents are to high and the government have sold of social housing ie thatcher.. so where do they go.. in a caravan where they are moved off all the time.. its a dog eat dog world of financial institutions trying to control people making you work to the bone.. hide in a cave and learn to hunt.... fish are actually free.
20/01/2013 00:46
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HMV gone under/BLOCKBUSTERS gone under and many more many more home owners next sorry to say and i do HOPE  all the internet poker sites is next total con 32red/poker stars/sky poker/all the bookies poker sites a total con
23/01/2013 10:49
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Lets get one thing straight most borrowers fully thought out the process and had plans in place however due to government taxation changes and interference most repayment vehicles failed failed such things as ISA mortgages, pension mortgages and Endownment mortgages. most of these have terminated with less than the premium placed in them.

The recession has killed off most peaples other plans for repayment that is by payback those elephant killers who harp on about people buying things they cant afford have obviously not been affected by the financial crisis, still have their job and so do their partners. You have only benefited.
Most people set off with clear intention but a salary is lost and an income is cut (take a 20% pay drop or leave scenario) soon find things difficult.

Now add to this a lender who sees they can exploit the borrower in this situation knowing they cant move their mortgage and raises the SVR to 4.75with a fixed rate at even higher than SVR in the case of Santander and 6% in the case of some with bank of ireland you soon find thing difficult. So the people with the most problems and difficulties brought about mainly by circumstance outside their controlnow end up paying the most thus creating the problem. The reason for this is to force the borrower off the books or repossess.

So the borrower is now reluctant to put sums into the payback as the intention from the lender is clear. Remember as an extreme example if you owe say as little as 5K on a 200k house and could not pay it you can lose the property and have no share in the equity. its a pact with the devil mostly.

Lets face it with a bank base rate at 0.5% mortgages should be no higher than 2.9% across the board let alone as a tracker or fixed. But to start charging one category of borrower 3% over the odds (normally self employed or small business), blocking access to lower rates and refusing access to equity on a 50% LTV property as in the case of santander is quite frankly sickening. But all in accordance with FSA guidance apparently.

Remember we are all in this together although some are more IN than others!!



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We bail out Scotlands banks, yet still the failed Endowments (most of whom came from Scotland) are not paid. Scottish banks and finance have a lot to answer for as to why they failed so badly. The Scottish banks should never have been bailed out they should have been left to go bust. I hope Salmond and his merry men pay their debts to society before going Independent. 
20/01/2013 00:42
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interest only mortgages should never been allowed as a product,i suggest these type of morgages were misold and anyone who has got one should be compensated.
26/01/2013 13:19
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I actually think most people know exactly what the terms of an interest only mortgage are,
but when the time comes to pay up, its poor me and a bout of amnesia sets in. I cant say 
i blame lenders for wanting a large deposit either, it keeps the borrower  focused with 
there money (deposit) at risk as well as the lenders (who were wonderful) when they first
came up with the funds. 
  Interest only mortgages in my opinion were and still are the best thing that ever happened
in property finance. A lot of mortgages never get paid off via income alone anyway. The
trick is to get the biggest house (and mortgage) you can possible get then when you have 
had enough for whatever reason sell up  and (hopefully) buy a smaller place outright.
I could go on..... but o wont!. What ever happens, stay calm and carry on peeps!
19/01/2013 14:56
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this is not to do with mortgages but if you could help me with a question I would appreciate it, PPI keeps raising its head in unwanted e mails and adverts everywhere ? can someone please tell me if the Government has said this was illegal, why have the companies not been made to repay what they have taken? why do people have to repay a percentage of what is owed to them to an ambulace chasing third party at nearly 60 I havent a clue if I am owed money or not ? though I have had loans over the years, it just seems another scam to take from those yet again who can least afford it ?
20/01/2013 18:32
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i have had another thought ,would you agree that this type of mortgage has created a self fueling inflation of house prices to the extent that they have become almost unafordable and now we are trapped into it,think we've got a real problem,so politicians get your thinking caps on.
24/01/2013 17:55
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A lot of people are naive with money, don't plan, and spend too much on rubbish in their lives.

People don't have a right to 1 holiday a year, they don't have a right to what the Jones's have.

There is a lot to be said for being competitive, playing competitive sports when you are younger, and playing strategy games. These teach the fundamentals of living ilfe in a competitive world. One of the worst things Labour and the left wing brigade did, was ban the concept of competitive sports.

 

Most people think the world is a soft easy place, and never had to graft for anything, or plan, or learn how to make it on their own.

 

To the guy who said if you are not born with it, or not been lucky or whatever, he is wrong, he just does not know any better. Thatcher taught us all if we graft hard enough, and plan well enough, we can become whatever we want, and she was right.

 

My dad left us when I was 7, leaving myself, my mum and younger sister, I was the man of the house from 7. (Though tbh my mum and sister were bloody amazing as well). We got by with casual farm labouring work which we did as a family, £2 for filling a sack of potatoes, 2p per daffodil etc etc sometimes in harsh conditions. It gave us enough to eat, my mum did not buy any new clothes for 10 years. We worked extremely hard at school, I was in the top 3 for grades, I knew I had to compete for everything and was going to have to work my way out of the mess we were in.

 

Anyways, got a decent job, continued to be a workaholic. My first job in the 90's, was £11k per year. I rented for £450 a month. It was a few years later, I managed to get myself up to £18k per annum, at which point I was able to get my first leasehold flat. 3x£18=£54k, I was able to get a 100% mortgage for a nice 2 bed £50k flat and get myself on the property ladder. Took a 25 year mortgate, and did capital and interest, I would never do interest only, you are only conning yourself. Over the course of the next 12 years, my property tripled in value to £150k, though the recession came, and it took a dive to £130k when I sold it. But that gave me equity, added to some savings I had made in that time, was able to get a £250k freehold house. (was able to put down 30% deposit in the middle of the recession). Recessions are a good thing if you have played your cards right, and saved during a boom (90% of people are short termist and spend everything), because cash is king, and you have it when no-one else does. Leaving home at 18, at 25 I took out my first 25 year mortgage, and am still on track for full payment at age 50.

 

My point is, starting from nothing, it is completely possible to strategically make something of yourself, and end up with a nice home etc in this country, if you are prepared to work and commit yourself to your long term goals.

 

 

21/01/2013 07:20
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The government should bring in legislation to make the insurance companies pay out what they promised to do ie. the amount of the mortgage,afterall the home owner has paid all the insurance premiums and now the insurance company has decided it will not honour it's commitment. I did have one of these,but my wife died and they did pay up,but it tiook them 11 months before it was settled and no compensation for all interest and legal costs to make them pay.
20/01/2013 20:49
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Gordon P and all others that replied. You're right i don't have a mortgage I've paid it off and when i did have one i didn't moan about the interest rates because i bought within my means,but if people sold their houses for what they are worth and not offers over then house prices would not be so high
20/01/2013 10:37
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Our house is on the market now with a hope that we get it sold before 2015, when our mortgage is due. The  mortgage consultant  was very confident  at the time that we would be able to pay off the £70.000(approx). We will be retiring soon, so we will be downsizing , so I suppose we're not as badly off as some others. But it's  definitly too late to think of plans for saving towards the final payment 

25/01/2013 15:31
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Most people who were fortunate to get a mortgage are not financial Guru`s. There are so many products available now that you take it in good faith from the lender that the one offered is best for you. There is no way an interest only mortgage should be offered without a means of paying it off at the end of the term, if you have been sold interest only with no additional product to enable it to be paid off then in my eyes you have been missold that product and should be entitled to compensation.

The problem is that banks have become building societies and building societies have become banks all fighting for the same customer.

Surely repayment mortgages only are the way forward at least you know the debt is reducing year on year.

27/01/2013 15:26
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Its the cost of credit card interest that is hitting and hurting most people, this should be sorted out by the government and it would also give people more money to spend which is what they want.
21/01/2013 19:41
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Hahahahahaha, I love it when people that start living above their station in life, come tumbling down. It serves them right for being greedy & superficial.

If you can't afford it then don't buy it, these very people that are complaining now, are the same people that were more than happy to make a large profit from their original home, which was the only reason they could have ever moved up the property ladder to a larger home.



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