Most people with interest-only mortgages are relying on house price inflation to dig them out of their hole, independent research has shown.
The majority (57.6%) with interest-only mortgages think house prices will rise enough for their debt not to be a problem at the end of the mortgage term, according to the research carried out among over 1,000 people for financial outsourcer HML.
HML chief executive Andrew Jones said: “There is an unrealistic expectation amongst a significant number of interest-only borrowers that annual house price inflation will return to double digits and dig them out of a sticky situation.
“There is a challenge to help consumers understand there isn’t going to be a return to runaway house price rises anytime soon and it is therefore their responsibility, along with lenders, to make appropriate arrangements to address the issue.
“The financial services industry needs to get a grip on this issue quickly and proactively contact borrowers to find a solution that is workable. Providers also need to think about innovative ways of helping people stay in their homes. What is clear is that doing nothing is not an option.”
HML’s research also revealed that only three out of ten borrowers with an interest-only mortgage are confident they have a plan that will repay the whole debt. This means seven out of ten people with an interest-only mortgage need help: most don’t know how they are going to repay it, or have the income to switch to a repayment mortgage.
Three out of ten home owners have an interest-only debt, made up of 16.5% with an interest-only mortgage plus a further 14.5% having a part interest-only and part repayment mortgage.
Awareness of interest-only among borrowers is not an issue. Of the people who know they have an interest-only mortgage, the majority (91.6%) know they need to repay the capital at the end of the mortgage term.
While a majority (59.7%) have a plan, 39.3% do not. Of those who do have a plan, only 47.2% are confident the whole debt will be repaid.
The most popular repayment vehicle is an endowment policy (40.9%) followed by a PEP/ISA (19.4%), savings (10.3%) and inheritance (1.3%). More than one in ten (13.6%) say they will repay the debt through other means.
When asked if they could afford an increase in monthly mortgage payments, 42.9% of interest-only borrowers said they could not afford to pay any more towards their mortgage, and 11.1% said they could afford an increase of less than £100 a month.
More than half (57.6%) of the respondents feel house prices will rise enough for the debt not to be a problem at the end of the mortgage term, but 26.6% said they didn’t think house prices would rise enough and 15.8% said they didn’t know.
Comments
I have an interest-only mortgage and I am very happy with it: it means I keep more of my hard-earned income to use for economically productive purposes, like providing operating capital for my business. I am paying a low fixed interest rate on the outstanding mortgage debt - effectively a long-term loan to me at much better rates than I could ever achieve via a business bank loan. The debt is also eroding in real terms, year on year, due to inflation, whilst my real working capital in my business is hopefully going to grow through my own efforts and beat inflation substantially.
I've no intention of paying down the debt until much later in my working life, if at all. Even if house prices stay static for another 20 years, I will simply sell the house to pay off the mortgage. I should have plenty of other investments available to buy another house, which will probably be smaller anyway as I will downsize as I approach retirement. Or if I've stuffed up my business and have little capital, I will just rent and accept the drop in standard of living.
This fuss about IO mortgages is ridiculously overblown. It will be a sad world indeed and an economically stultified one where the only mortgages available are 3-4 x salary multiple and repayment ones linked to expensive, poorly-performing endowments and other largely bond-based investments, as most were before the 1980s. Those who insist that mortgages must be based on a single fixed salary multiple and repayment terms assume that everyone is a conventional salaried employee, whereas the reality of today's complicated working life is that millions of people are business-owners, self-employed and with highly variable family incomes which do not fit such tidy categories. Because of the nature of my business, my income over four years might be just £8000 one year (this minimises income tax, whilst my mortgage is covered from personal savings), then £50K the next year if I can afford it and choose to declare a dividend, then £100K ditto, then £8000 again. How am I supposed to get a repayment, salary-multiple mortgage with an income pattern like that? "Income" is a paltry, feeble way of measuring affordability in a world where many people also have rental investment income, capital gains and company dividends as sources of wealth.
'The Truth' (a Misdescription of the highest order in my opinion...):
"Well they had better rely on something else cos it just ain't gonna happen..."
Just HOW MUCH do you expect average basic inflation to be over the next 25 years? What's the cost of living gouing to rise by every year? Two percent per annum? Three? More?
And what about house price inflation?
A mere two point eight percent average will double their original investment, allowing these people to sell the property, pay off the original amount and have the same again in their pockets!
If, by some miracle, there is ABSOLUTELY NO house price inflation over 25 years - then the property will simply sell for what it was bought for (which by the way, will probably be in real terms less than half...) and pay itself off.
SO... WHERE'S THE PROBLEM?
Mountains and molehills come to mind - but then that's all you ever have to bring to the table...
Happy Chappy: Please explain this statement - "Many of these same people hoping for House Price Inflation to pay off the capital are very likely to dissapointed and highly likely to be stuck in the current property for a long time."
"Most people with interest-only mortgages are relying on house price inflation to dig them out of their hole, independent research has shown."..........Well they had better rely on something else cos it just ain't gonna happen while there is an ever shrinking pool of available money. Over-leveraged idiots made their own bed and they can lie in it !
Oh Dear....did anyone see the Daily Mail article where owners on IO mortgages were trying to claim they were misold mortgages!
Here you have the truth people know exactly IO means but cannot afford there current home any other way.
Many of these same people hoping for House Price Inflation to pay off the capital are very likely to dissapointed and highly likely to be stuck in the current property for a long time.