1.3m interest only mortgages with no way to pay off

Wednesday, 19 November 2008 02:04

A total of 1.3 million interest only mortgagees have no vehicle for repayment behind them, while some 456,000 interest only borrowers could be in negative equity by the fourth quarter of 2009.

Research by LV= points to 45 per cent of all interest-only mortgages having no backing behind them to pay off the loan.

Borrowers with interest-only mortgages only repay the interest on the loan and not the cash to pay for the home. Since the early 1990s borrowers have not been obliged to have an investment plan linked to their interest only mortgage.

Forty-one per cent of the interest only borrowers who have no capital payment plans are relying on selling their home and using the proceeds to pay off their mortgage.

LV= is now warning with recent falls in property prices and further declines predicted, this strategy may be blocked for many people in the short to medium term.

Mike Rogers, LV= group chief executive, said: "A previously booming property market led many people to bank on being able sell their home, use the proceeds to pay off the mortgage, and still have enough left to buy another home.

"However, this strategy may have been overturned by current and predicted future falls in property prices. These people should therefore seriously consider investing as much as they can now, and regularly, to help pay off the mortgage capital at the end of the term."

He added: "We urge interest-only borrowers with no firm capital payment plans to review their options, save as much as they can regularly, and seek professional advice early if needed."

LV= also found ten per cent of interest-only borrowers said they did not realise they were only paying interest, and would need to find additional money to pay off the capital.

Forty-three per cent said they could not afford to put aside any additional payments, on top of the mortgage interest.

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