Would you buy and renovate a property in France? Soaring numbers of borrowers with interest-only mortgages are turning to high-cost equity release pay off mortgage or invest calculator to avoid losing their family home.
Around one million homeowners are lumbered with interest-only mortgages that they don’t know how to repay. With these deals you pay just the interest on a loan and have to repay the capital at the end of your term. The City regulator, the Financial Conduct Authority, has warned of a wave of repossessions in 15 months’ time because many of these borrowers have ignored warnings that they have not planned for a way to pay back what they owe. So in a last-gasp bid to stay in their property, huge numbers are cashing in on the value of their home by using equity release to take out loans worth tens of thousands of pounds.
They then use this money to pay off their interest-only debt. Equity release is a high-cost type of loan that allows homeowners to take a cash lump sum based on the value of their property. An estimated one in three borrowers who took an equity release loan last year did so to pay off mortgage debt, figures from specialists Key Retirement Services reveal. But these equity release deals can be eye-wateringly expensive because borrowers don’t typically repay any interest on the loan, so the debt builds up and can more than double in a decade. The money is typically repaid when the homeowner dies or goes into care and the property is sold. It is clear that paying off interest-only mortgages is a major and growing reason for taking out an equity release loan.
And as more and more interest-only loans mature for mortgage prisoners, we expect numbers to increase even further. 3 million homeowners with an interest-only mortgage. This type of loan was popular in the Eighties and Nineties. Those who took one out also typically had to save into an endowment investment policy, which was supposed to pay off the mortgage, plus a bit extra.
But many of these plans failed, leaving borrowers with shortfalls. Others expected a windfall or planned to start saving, but neither happened. Some had planned to re-mortgage at the end of their term but are now finding strict new rules mean banks won’t lend to them. Interest-only borrowers owe the banks billions. An investigation by the Financial Conduct Authority revealed around 600,000 interest-only loans are due to mature before 2020. A further 260,000 have no repayment plan in place whatsoever.