Interest-only mortgages: what the experts think

AT THE HEIGHT of the housing boom in 2007, a third of all new mortgages taken out in Britain were of the interest-only variety – "making no provision whatsoever for regular repayment of the principal borrowed", as The Guardian puts it.

"Sometimes there was some form of endowment, a punt on stocks which would, with luck, produce the funds to repay. Sometimes there was simply a crass assumption that property prices would continue to rocket at a rate that would shrink debt to a point of insignificance".

But the upshot, according to the new Financial Conduct Authority, is that some 1.3m borrowers face the "ticking time-bomb" of an average repayment shortfall of £72,000 over the next 30 years. Around 130,000 have no plan at all for repaying the debt.

The good news for most borrowers is that they have time "to plan a satisfactory strategy" before their mortgages reach maturity, said Paul Smee of the Council of Mortgage Lenders in the Daily Telegraph. Most of the debt won't fall due until the 2020s, with the biggest spike maturing in 2032.

The best course, given record low mortgage rates, is to switch to a repayment deal as soon as possible – assuming you can bear the higher monthly payments, said Julian Knight in the Independent on Sunday. If you can't afford to switch immediately, focus on building up a savings pot so you can pay down some of the capital on the mortgage or increase your equity – making it easier to switch to a repayment mortgage at a later date.

Unsurprisingly, most mortgage brokers maintain you'll strengthen your arm in negotiations if you take independent advice. That's particularly important for some 250,000 older home-owners, with "woefully" under-performing endowment plans taken out in the 1990s, who now face a more immediate deadline, said Leah Milner in The Times.

Since most have benefited from rising home values, they have a range of options: including downsizing, taking out equity-release loans, re-mortgaging, or perhaps diverting some of their pension cash to clear the shortfall. The optimum route depends upon your particular circumstances. Take advice.

This article appears in the 11 May 2013 issue of The Week. · 

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