Nearly 400,000 homeowners are due to repay their interest-only mortgage over the next five years. However, around 250,000 won’t be able to refinance to a new deal, according to research from Kensington Mortgages.

By January 2024, approximately 250,000 UK homeowners will reach the repayment date for their interest-only mortgage and will be unlikely to find a new deal. This means around 15 per cent of the 1.7 million British borrowers who currently have an interest-only mortgage may be forced to repay their loans in full.

Interest-only mortgage prisoners

While some borrowers will be expected to switch to a new mortgage or move to a new home after selling their properties at a profit, it is predicted that some will be unable to escape the bill, requiring a lump sum payment of the full mortgage amount.

National Landlord Investment Show – MPU

Even if their property has increased in value, some borrowers will find it hard to find lenders offering them conventional repayment mortgages, due to their age. As many of these individuals will be nearing retirement and therefore with fewer years to pay back a loan, they will fall short of tight affordability checks.

These ‘interest-only mortgage prisoners’ as they are sometimes known, will be charged with finding the total amount for their mortgages or selling their properties to cover the costs, according to Kensington Mortgages.

This comes only a matter of months after the Financial Conduct Authority announced it would be opening consultations on lending regulations, in order to help mortgage prisoners switch towards mortgages with authorised and active lenders.

Alternatives for borrowers

A new offering of interest-only mortgages for older people has been introduced to the market by a few specialist lenders and banks. These deals could offer a lifeline to thousands of people who have an interest-only home loan that’s coming to an end, according to Kensington Mortgages.

These new retirement interest-only mortgages (RIOs) will allow borrowers to pay off their balance through the sale of their home after they die or move to long-term care. While this will reduce the inheritance they are able to leave to their family, it could be necessary for many borrowers to keep their homes while they are alive.

A growing concern

The interest-only mortgage problem is predicted to get worse over the next two decades. By January 2029, almost 860,000 interest-only mortgages will have reached the end of their term, according to Kensington Mortgages’ predictions.

Around half of these borrowers are predicted to get to the end of their mortgage terms without having found a new deal to switch to, forcing them to consider the sale of their properties or new RIO mortgages.

A problem lurking in Britain’s financial system

Mark Arnold, chief executive of Kensington Mortgages commented: “This is a big problem that is lurking in Britain’s financial system. It’s important that people start thinking about this issue now, before thousands of homeowners find themselves facing a giant repayment bill that they are unable to deal with.

“Society has changed a great deal in recent years. Yet the big banks, driven by risk considerations, now lend to fewer and fewer people. The people who will be facing these bills will have a very different customer profile at the expiry of their mortgage than they did 25 years earlier when they took out these products.

“Many will have retired. Of those who are still working, many are likely now to be self-employed. Some may have moved from full-time work into the gig economy,” he said.

Mr Arnold also believes that many of these individuals could still be capable borrowers, despite their inability to meet the tight lending criteria of certain lenders. He added: “To those people who think they may be affected by this, my advice would be to go and talk to a mortgage broker sooner rather than later, to see if there is a specialist lender that may be willing to offer you a better deal.”

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Jim Kersey
Jim focuses on the socio-economic impact of housing. His reporting for Property Notify often touches on topics such as changes in sentiment among investors in various housing sectors, as well as the impact of various developments on the average person.

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