What is an interest-only mortgage, how to calculate your rates

Plans to make it easier for mortgage borrowers to shop around have been proposed by the City regulator, after it found nearly one in three people fail to find the cheapest deal.

The Financial Conduct Authority (FCA) said these people could have saved £550 per year with a lower-priced deal. It is also exploring ways to help “mortgage prisoners” – longstanding customers who are trapped in their existing deal – to switch.

Publishing its interim report into the mortgage market, the FCA said it had found that competition was working well for many people. But it also identified ways in which the market could work better.

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Mortgage debt accounts for more than 80% of total UK household liabilities, so selecting a deal is one of the most important financial decisions consumers have to take, but it can be a difficult one to get right, the FCA said.

The regulator said that while there was little evidence that current arrangements between firms were leading to poor consumer outcomes, there was no easy way for people to be confident at an early stage of the mortgage products they qualify for.

This is a significant impediment to shopping around, and about 30% of customers fail to find the cheapest mortgage for them, it said. On average, these consumers were paying approximately £550 per year more over the introductory period of their mortgage compared with the cheaper product.

One approach could involve lenders making the necessary eligibility and other qualification criteria available to other market participants consistently at an earlier stage, the FCA suggested. This should help brokers and also create other opportunities for new online tools, it said.

The FCA also proposed making it easier for people to compare mortgage brokers, saying it intended to work with the broker sector to develop ways to compare deals.

The report said: “We found that on average a consumer’s choice of intermediary makes a difference to the eventual cost of their mortgage. In particular, we have observed links between more expensive mortgages and intermediaries that typically place business with fewer lenders. But there are few tools to help consumers choose an intermediary.”

Christopher Woolard, the FCA’s executive director of strategy and competition, said: “For many the market is working well with high levels of consumer engagement. However, we believe that things could work better with more innovative tools to help consumers.

“There are also a number of longstanding borrowers that have kept up to date with their mortgage repayments but are unable to get a new mortgage deal; we want to explore ways that we, and the industry, can help them.”

The FCA also outlined how “mortgage prisoners” could be better helped, many of whom took out interest-only deals before the financial crisis. Stricter lending practices since the crisis have made it harder for these customers to find a cheaper mortgage.

The regulator suggested there could be an industry-wide agreement for lenders to approve applications for a new mortgage deal from existing customers whose most recent mortgage was taken out before the financial crisis and who are up to date with their payments.

The FCA will consult on the findings and proposed remedies, with a final report due around the end of the year.

Around 1.67 million borrowers have interest-only mortgages and a significant number are at risk of losing their homes

But when you reach the end of an interest-only mortgage term – which is the deadline by which your loan must be repaid (normally between 25 and 30 years)– you will have to hand the property back to the bank unless you have another way of paying the lump sum.

What is an interest-only mortgage?

Around one in five borrowers, or 1.67 million people, have interest-only mortgages.

Tens of thousands of these loans will need to be repaid over the next few years.

The City watchdog warned earlier this year that a “significant number” of people are facing shortfalls and are “at risk of losing their homes.”

The Financial Conduct Authority (FCA) has referred to the crisis facing these borrowers as a “ticking time bomb”.

The problems are worst for borrowers who are approaching retirement and will not be allowed to remortgage due to their age and the fact their income will drop when they stop working.

Who are interest-only mortgages for?

Interest-only mortgages are only suitable for borrowers who have substantial savings or investments which they could use to pay back the loans when they fall due.

Borrowers opted for interest-only mortgages to keep their payments low but many didn’t understand the risks

But some people did not understand they would not own their homes at the end of the loan term

Other borrowers were sold investments by the bank alongside their home loans called “endowments”.

These were meant to grow over time so that borrowers could pay off their mortgages, but most of these investments failed to perform as well as expected leaving borrowers with a substantial shortfall.

In 2007 just before the global financial crisis, as many as a third of all new mortgages were sold on an interest-only basis.

This figure has fallen to just 4 per cent of all new mortgages today, after regulators raised concerns and lenders were forced to take a more cautious approach. opted for interest-only mortgages to keep their payments low and to allow them to borrow more.

What can you do if you have an interest-only mortgage?

If you have an interest-only mortgage it’s important to act as soon as possible and not to bury your head in the sand.

Speak to your mortgage lender and see if you can afford to switch to a repayment mortgage.

If you have enough time left before retirement, it may be possible to extend the term of your mortgage in order to give you more time to pay it back.

It is also worth speaking to a specialist independent mortgage broker like Apple Finance to see if you are able to switch to another lender with a lower rate.

This would allow you to put more of your monthly payments towards repaying the outstanding debt rather than just covering the interest costs.

A broker will also be able to help you to find lenders that have higher age limits.

Many lenders require borrower to pay back their mortgages by the time they reach 75, but others are more flexible so long as borrowers have enough pension income to keep up their payments.

David Hollingworth, of broker L&C, says: “It makes sense for those with interest only mortgages and no  repayment plan to consider their options sooner rather than later.

“Halifax, Leeds Building Society and Skipton will lend to borrowers up to age 80.

“Nationwide Building Society and Bath BS will consider lending to borrowers up to age 85.

If your house has grown substantially in value since you took out your mortgage, you may be able to sell and still have enough after paying back the bank to buy a smaller home.

Contact us at Apple Finance to discuss your options.

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