Worries grow over households on interest only mortgages

The Financial Conduct Authority (FCA), which in a week takes over the work of the Financial Services Authority (FSA), is worried that about 4 million homeowners on interest only mortgages will be in dire financial straits with payments on capital due soon. The situation is being compared to the 1990 negative equity trap and the mortgage endowment market collapse.

FCA together with industry leaders is on the process of determining the level of potential crises homeowners are likely to face. FSA has conducted a Mortgage Market Review scheduled for release in May and it is expected to present the growing concern of FCA that a lot of homeowners won’t be able to pay the capital for interest only mortgages.

FCA is worried many of the current interest-only mortgage clients not having the ability to pay because of the absence of a repayment scheme. FCA also cited that the possible abrupt withdrawal of creditors can compel interest-only loans to go for repayment mortgage deals or deal with specialised lenders for re-mortgage, driving costs to levels where household budgets get tremendous strained.

Last week HSBC declared its intention to pull out the interest-only market and its plan to retain only its richest clients. The HSBC announcement came the same day Yorkshire Building Society announced similar intention, while other lenders are no longer investing on new interest-only mortgages.

FCA fears many home owners will not be able to pay their loans when their 25 year term ends. In later part of the 1980s when the popularity of interest-only mortgages was at its peak, more than 80% of all loans were interest-only mortgages.

The Mortgage Lenders Council, representing about 98 percent UK mortgage lenders, believes there are around 3.8 million interest-only borrowers with outstanding mortgages. Last year, however, only about 40,000 interest-only mortgages were financed by lenders, this figure accounted for not even 10 percent of all loans.