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Dealing with the interest-only mortgage time bomb is ‘like playing Space Invaders’

Robin Bowman

Robin Bowman
May 17, 2018


The task of trying to help thousands of homeowners who have interest-only mortgages and will soon need to pay them off is like playing the 80s computer game Space Invaders, a bank body has said.

Thousands of people took out interest-only mortgages because they were cheaper than capital repayment ones.

But because only the interest on the loan is paid off, homeowners face paying off the full cost of the loan at the end of the term.

They have three choices, save up the money over the years, remortgage if they are not too old to get a mortgage they can afford, or sell up, pay of the loan and downsize.

Lenders have been contacting these people urging them to save money to deal with the big bill when it arrives.  

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But the banking trade body UK Finance says that over time this has become increasingly harder - like playing Space Invaders. 

Banks must improve who they target to reach those borrowers who are reluctant to discuss how they are going to pay off their mortgage, according to James Tatch, an analyst at UK Finance.

"For those of us that remember it, we could think of this challenge as being like Space Invaders: at the start of the game there are plenty of targets, albeit that most are far away," he said.

"It is relatively easy at that point to fire and hit quite a few targets, particularly the nearest ones, even if your aim is not that good. As the round progresses, more and more of the simpler targets are eliminated successfully, leaving the faster-moving, more elusive ones.

“So, you need to improve your aim, and make your strategy more agile, to pick off the shrinking numbers ahead of you."

UK Finance said 1.7 million homeowners had ongoing interest-only mortgages, nearly half the number seen in 2012, when this data was first collected.

The total value of the interest-only mortgage book was £250bn, down 37% in the same period.

Lenders have been writing to these customers asking how they will pay off the lump sum, but accepted it was "a challenge" getting people to face the problem.

Regulators are concerned that the problem of final bills is a ticking financial time bomb.

In the past year, thousands of people have faced these bills – those who took out endowment policies in the 90s and 2000s.

These were mortgages in which the borrower paid into an underlying investment that was supposed to pay off the capital of the loan at the end of its period. 

Other, less well-off homeowners, switched to interest-only deals between 2003 and 2009 in order to save money on their monthly payments. Many face a final payment demand in 2027–28. 

Jackie Bennett, Director of Mortgages at UK Finance, said: "There remains plenty more work to do over the coming years to ensure that those remaining borrowers who have so far been reluctant to engage have viable repayment plans in place. 

"We continue to encourage all borrowers with interest-only mortgages to contact their lender as soon as possible, as the sooner they do so the more options will be available."

Options include paying off the lump sum with savings, or taking out a new repayment mortgage.  But for older borrowers, this is not always possible, or affordable. Many may not even qualify for a repayment mortgage.

Most lenders will try and work out a deal that works for both parties, but in extreme cases, borrowers may have sell up to pay off their loan. 

UK Finance has published a Frequently Asked Questions document today on interest-only mortgages.

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