Mortgage timebomb, could you fall victim?

property from aboveOwen Humphreys/PA Wire/Press Association Images

There are warnings today of an interest-only time-bomb primed to explode. A report in the Daily Mail has highlighted that a combination of failing investments and falling house prices could mean thousands of Brits have to sell up when their mortgage expires. Add a tough mortgage market to the mix and many may well find that their day of reckoning is closer than they think.

So what can they do?

The effects

The report highlighted the plight of the many borrowers who have taken interest-only mortgages, and been caught out by the financial crisis, which had three striking effects.

The first was to halt the house price boom in its tracks, and begin a serious slide. In some areas this has been a largely horizontal shift, where prices have fallen little more than 5%. In other areas falls have easily topped 25% in that time. It has destroyed the plans of many who were hoping to pay off their interest only mortgage by selling up at the end of the loan period and only having to downsize slightly to repay the original sum.
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The second effect is the destruction of many investments which were set up alongside these mortgages and intended to pay them off at the end of the loan term. We have seen more than ten difficult years in the stock markets, and as a result, many of the investments established to pay off the loan are set to fall way short of the target they require.

Mortgage market

And the third is the massive change in the mortgage market. Remortgaging onto an interest-only mortgage is proving nigh-on impossible right now. The number of mortgages in general has dwindled dramatically, but the effect is even more striking for interest-only mortgages, which have been withdrawn in many cases and in others the criteria has been tightened so stringently that many people no longer qualify for a loan. Many have set Loan-to-Value requirements to around 50% - 60%, and many others are requiring proof of very large investments to pay off the mortgage.

This has pushed the accelerator button on the time-bomb. It means that many people who were facing a possible nightmare at the end of their loan will have to face it earlier, as they are forced to remortgage onto an repayment loan. At this point they will have to increase their monthly payments dramatically, and if they can't afford the difference then the downsizing they were expecting in retirement may well come sooner.

New research from unbiased.co.uk, the professional advice website, reveals that of the 11.2m households in the UK with a mortgage, an astonishing 1 in 7, (1.6 million) are simply paying off the interest each month and not repaying capital or saving anything towards paying off their mortgage debt in the future. It means many hundreds of thousands may find themselves in difficulties sooner rather than later.

What can you do?

However, all is not lost. If you are a fair way into your interest-only mortgage there is a reasonable chance you have built up a decent chunk of equity and may still be in a position to downsize to something sensible at retirement. It may even have reduced your mortgage to the kind of size where a switch to a repayment deal at this stage isn't going to break the bank.

If you have just begun and cannot remortgage onto interest-only, then this is a chance to get back on track, and so avoid a nasty problem at retirement. You will take a hit now, but at least it will come at a time when you still have an opportunity to work your way back into the property of your dreams.

It's worth talking to your mortgage company or a broker in any case. A broker will help you find a solution, they could track down an interest-only deal, or work through all your options to find the best one for your position.

Barrett says:"To avoid any kind of payment shock when you remortgage and to ensure you have paid a considerable chunk of your mortgage off before you retire, it is vital to see a whole of market mortgage adviser. They will be able to help you get the best mortgage deal possible which matches what you can afford or talk you through the options for a repayment plan ensuring that you are fully prepared financially for your future."

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