Borrowers with interest-only mortgages have been urged to seek advice after a leading banker raised concerns over the number of people struggling to repay their loans.
New Barclays chief executive Anthony Jenkins predicted this week that interest-only mortgages may be the next big mis-selling scandal. He identified the loans as a likely source of future complaints and said the bank, which has a large chunk of interest-only loans on its books, had already seen thousands of borrowers with problems repaying their capital.
Industry experts have been expressing fears for some time over the number of people with interest-only mortgages but with no viable means of repaying their capital at the end of the term.
Interest-only loans work by letting the borrower pay the interest first and clear the actual capital at the end of the term. They sold in massive numbers during the housing market boom, when homeowners and lenders were confident that house prices would continue soaring and enable capital to be repaid with sale proceeds.
But some eight in ten people with interest-only mortgages maturing over the next decade have no adequate repayment strategy in place, according to the Financial Services Authority (FSA), which described the scenario as a “ticking time-bomb”.
The problem for borrowers has been exacerbated by a marked tightening of lending criteria. Where they used to offer interest-only loans to those with just 10 per cent deposits, most lenders now demand equity or a deposit of at least 50 per cent.
They have also clamped down on the repayment plans they will accept. The Lloyds Banking Group brands, for example, will no longer accept cash savings (including Isas) as a way of repaying the capital on an interest-only mortgage.
The crackdown came in anticipation of a regulatory ban on interest-only mortgages. The Financial Services Authority (FSA) has now moved away from that option, but it still plans restrictions on the way interest-only deals are repaid.
“Lenders have changed the goal posts massively over the last two years and many borrowers are going to be stuck on a variable rate because they need to retain the interest-only payments,” said Alison Mitchell, mortgage expert at Edinburgh IFA Robson Macintosh. ”Lenders are choosing who they wish to lend to and interest-only is just another way of sifting out the unwanted.” That helps explain why lenders are being increasingly pro-active in checking if borrowers are on course to repay their mortgage.
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