Homeowners in their 50s with interest-only mortgages are sitting on a “ticking time bomb” that could have a devastating impact over the next decade, a regulator has warned.
Speaking in front of the House of Commons’ Treasury Select Committee, Martin Wheatley, a director at the Financial Services Authority (FSA), raised fears about interest-only deals coming to the end of their term where homeowners have no hope of paying off the loans.
Interest-only mortgages, where monthly repayments cover the interest to the lender but the capital does not have to be repaid until the end of the deal, were popular in the last property boom.
An estimated 1.5 million of the loans worth around £120 billion are due for repayment over the next 10 years and many people are feared to have no repayment strategy.
Mr Wheatley said: “There is a ticking time bomb that’s been created over the last 20 years and what we’re trying to do is to make sure that that ticking time bomb does not get any worse from here on in.”
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Under FSA plans for the mortgage market, interest-only loans will only be offered in future where there is a credible plan to repay the capital.
But the rules do nothing to address the problems of existing borrowers. Conservative MP Michael Fallon asked why the regulator was not doing more to help those in their late 50s who have no repayment vehicle in place. Borrowers unable to repay the loans could find themselves unable to remortgage and stuck in unattractive deals. In the most severe cases they could even be forced to sell their homes to repay the capital.
Mr Wheatley told the hearing: “We’ve suggested some transitional arrangements for people who might otherwise be caught unable to remortgage or refinance, so there are in our proposals transitional arrangements which will allow, subject to certain conditions, the roll over into a new mortgage.”
Sales of interest-only mortgages now account for less than 20 per cent of mortgage sales.
For more on how to cope if you are an interest-only borrower read How squeeze on interest-only will affect you