Experts Warn Of Interest-Only Mortgage Shadow Descending Over UK Property Market
Kensington Mortgages, a specialist mortgage lender that focuses on borrowers such as the self-employed that don’t meet traditional criteria, has added its own warning on interest-only mortgages to concerns already voiced by the FCA. Last year the FCA warned that a “significant number” of UK home owners on interest-only mortgages faced the risk of losing their homes when forced to start repaying the original capital of the loan.
Kensington says its own research indicates that 250,000 British home owners will be at risk by 2024, when their deals will expire and they are forced to refinance. That then spikes by another 860,000 such deals that will expire by 2029. The figures exclude homeowners that originally took out interest-only mortgages but subsequently refinanced or who have sold their home at a profit in the meanwhile.
Interest-free mortgages are particularly popular for investment properties on the buy-to-let market. Only the interest is paid every month with the initial capital value of the loan remaining outstanding. It lowers monthly expenses with remaining rent after interest payments providing investors with regular income. The original mortgage value is then paid off when the property is sold, with any profit being added to the surplus rental income as investment return.
With property values rising continuously over the past few decades, barring a few blips such as when the international financial crisis hit in ’08, the model worked well. But it leaves investors exposed to negative equity if property prices do drop. Or left to foot higher much higher monthly expenses when their interest-only deals run out. And if they don’t at that point meet the lending requirements to qualify for a new mortgage deal either with their existing or a new lender, allowing them to pay of their outstanding debt, the properties could potentially be repossessed by the original lender.
Last year the FCA estimated almost 20% of all UK mortgages are interest-only and a total of 1.67 million interest-only or on ‘part-capital repayment plans’, where only small sums are paid off from the original debt every month. It expects the maturity rate of these mortgages to have two peak in coming years – the first in 2027-28 and a second in 2032.
The problem is that many home owners on interest-only mortgages will have retired by the time they reach maturity and need to be refinanced. Or will have a different employment profile such as only working part time or in the ‘gig economy’. Both scenarios would see them struggle to refinance.
It’s a shadow hanging over individual property owners and the UK market as a whole and one that has the potential to depress the market in future years. Owners of investment properties with interest-only mortgages are advised to refinance while they can and to start exploring options well ahead of the maturity date on their deals in case getting a new mortgage proves harder than they may have anticipated. The same goes for those with interest-only deals on their primary residence.
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