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1 million mortgage holders have no plan on how to repay

4 September 2015

Around a million people could have their homes repossessed because they have no way of paying off their interest-only mortgages, Citizens Advice has warned.

New research from the national charity estimates 934,000 people have interest-only mortgages and do not have a plan on how to pay it off when their term ends.

Time is running out for some people who will either have to sell their homes, find the capital to pay off the debt or could risk having the property repossessed.

Some of the people who came to the consumer champion said they  were not made aware that they would need to repay the capital at the end of their term. The average shortfall was previously estimated to be £71,000.

The charity says that in the UK there are 3.3 million mortgage holders who have interest-only products. Through polling it commissioned to Yougov, it estimates:

  • 1.7 million of these say they have no linked repayment vehicle, such as an endowment or ISA.

  • 934,000 of these have no plan for repayment.

  • 432,727 of these people have not even thought about how they will repay the capital.

Rules were tightened in 2012 to ensure interest-only mortgages were no longer available without a repayment plan, which has resulted in a major drop in the number of products sold. Citizens Advice supports this change, but says people who already hold these mortgages need more support.

The charity is concerned that interest-only mortgage holders do not have the same protections when their term ends than when mortgage holders fall into arrears. A protocol was launched three years ago which gives lenders a legal obligation to consider alternative options before starting possession action, including extending the length of a mortgage, changing the type of mortgage and giving people reasonable time to sell their property if necessary.

But these protections do not apply to interest-only mortgages at the end of the term – at the very point when many customers discover they are in trouble.

Gillian Guy, Chief Executive of Citizens Advice, said:

“People buy a home for stability – but interest-only mortgages have forced many into a financial black hole.

“It is good rules around these mortgages have changed, but there are many people who previously took out these products and face losing their home.

“Lenders have to exhaust all other options when borrowers get into arrears – it’s time to level the playing field so that interest-only customers get the same protections when their mortgages mature.

“It is also important that people can get independent advice, guidance and support about how they can plan and manage their finances."

The Financial Conduct Authority (FCA)  has said that due to previous peaks in the sale of interest-only mortgages, they expect there to be waves of potential repossessions – 2017-18, 2027-28 and in 2032.

In 2013 the FCA called on banks to contact all borrowers with interest-only mortgages ending before 2020 about how they plan to repay. But only around 30 per cent of borrowers responded.

Citizens Advice says lenders should have to do more preventative work to help customers prepare for the end of their mortgage. It urges companies to phone customers or offer of a face to face meeting.

The charity also recommends that lenders should have to follow steps before taking an interest-only borrower to court, including:

  • A requirement to discuss a range of repayment options.

  • A requirement to discuss moving to an alternative mortgage product, including extending the duration of the mortgage.

  • Enough time to sell their home for market price if necessary.

Notes to editors

  1. All figures, unless otherwise stated, are from YouGov Plc.  Total sample size was 2137 adults (18+). Fieldwork was undertaken between 28th May and 2ndJune 2015.  The survey was carried out online. The figures have been weighted and are representative of all UK adults (aged 18+).

  2. The Citizens Advice service comprises a network of local Citizens Advice, all of which are independent charities, the Citizens Advice consumer service and national charity Citizens Advice. Together we help people resolve their money, legal and other problems by providing information and advice and by influencing policymakers. For more see the Citizens Advice website.

  3. The advice provided by the Citizens Advice service is free, independent, confidential, and impartial, and available to everyone regardless of race, gender, disability, sexual orientation, religion, age or nationality.

  4. To find your local Citizens Advice in England and Wales or to get advice online, visit citizensadvice.org.uk.

  5. You can get consumer advice from the Citizens Advice consumer service on 03454 04 05 06 or 03454 04 05 05 for Welsh language speakers.

  6. Citizens Advice Bureaux in England and Wales advised 2.5 million clients on 6.2 million problems in 2014/15. For full 2013/2014 service statistics see our quarterly publication Advice trends.

  7. Citizens Advice service staff are supported by more than 21,000 trained volunteers, working at over 2,500 service outlets across England and Wales.