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Interest-only borrowers banking on HPI rises

Sarah Davidson

November 1, 2012

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 among more than 1,000 people also revealed that only three out of ten of 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.

Nine out of ten people know they will have to repay the interest-only debt.

Three out of ten homeowners have an interest-only debt – 16.5% of borrowers have an interest-only mortgage with 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.

Endowment most popular repayment vehicle

Having a viable plan to repay the debt is a problem. A majority (59.7%) have a plan, 39.3% do not. Of those people who do have a plan only 47.2% are confident the whole debt will be repaid.

This means seven out of ten people with an interest-only mortgage need help to repay the capital at the end of the mortgage term.

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.

Minority could afford a switch to a repayment mortgage

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, 11.1% said they could afford an increase of less than £100 a month.

Some 12.5% said they could afford to pay more than £100 extra a month and 29.6% said they could afford to pay significantly more towards their mortgage than they currently do.

House Price inflation to the rescue

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, 26.6% said they didn’t think house prices would rise enough for it not to be a problem at the end of the mortgage term and 15.8% said they didn’t know.


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