Recently, both HSBC and the Yorkshire Building Society have stopped offering interest only mortgages to their new customers. This news comes on the wave of other announcements about the state of interest only mortgages in the UK, which have recently been affected by a regulatory clampdown.
Each new story seems to further highlight the inherent dangers of opting into an interest only mortgage. Unfortunately, according to recent figures published by The Guardian, up to three-quarters of mortgage owners, who are aged over 60, have such arrangements.
Why Are Interest Only Mortgages Dangerous?
Interest only mortgages work by allowing the borrower to pay off only the interest on the mortgage every month. The initial agreement will stipulate that this arrangement will continue for a fixed term, at the end of which the borrow will pay off the remaining balance in full. However savings have taken a hit, across the board, in the years since Britain slipped into the latest recession, and are now at an all time low.
The implications are that many interest only mortgage borrowers will face significant difficulties at the end of their lending term, with the majority finding themselves unable to afford the final payment. In addition, with the current housing market in crisis, homeowners who are unable to settle the balance of their interest only mortgage may find themselves in the unfortunate position of also being unable to sell their property. Many homeowners are turning, instead, to established quick property sellers such as NPT, who promise quick home sales.
Why Are Interest Only Mortgages Becoming Unpopular?
Interest only mortgages used to popular with first time property buyers and buy-to-let landlords, as they offered a means of getting onto the property ladder without the need for a significant upfront investment and expensive monthly repayments. However lenders are now coming under pressure from regulatory bodies to be more thorough in assessing the capabilities of their customers to keep up with repayment agreements, and this includes the provision that their customers will be able to afford an end-of-term lump sum.
According to This Is Money, nearly 4 million homeowners are at risk of defaulting on their interest only mortgage agreements, as they can’t afford to meet final payment demands. The Financial Conduct Authority has voiced concern over the situation, and claims to be working with the mortgage industry to prevent a market collapse. In light of this, it’s no wonder that HSBC and the YBS have stopped offering their own interest only mortgages to all but their richest clients.
