As we reported yesterday, there are growing concerns over a so-called interest-only time-bomb. Around 40% of all UK mortgage-holders are on interest-only deals, 1.5 million of which are set to expire in the next nine years. The trouble is that in the intervening period, mortgage companies have changed their rules dramatically, which mean many hundreds of thousands of these borrowers would not be able to re-mortgage on an interest-only basis today.
And the experts say the over 50s will face the most damaging problems.
FSA rulesThe scale of the problem is overwhelming. The FSA says that some 80% of people with interest-only deals have 'no repayment strategy'. For those who have been investing alongside their mortgage, in many instances investment disappointments mean their strategy is falling far short of their expectations.
The FSA is planning to get tough on interest-only mortgages - so you will need to robustly prove your repayment strategy before you are allowed to take out an interest-only deal.
The new rules will come in at least a year down the track, but lenders are already responding and have tightened up their lending criteria. Some, for example, not only insist you have something like an ISA to pay the loan off - but will assume no investment growth at all over the course of the loan. It means you'll need to be putting a very sizeable chunk of money into your investments to satisfy the lenders.
UnaffordableUnsurprisingly, many people who are currently investing nothing to pay off their mortgage, will seriously struggle to put aside enough to satisfy their lender. With nothing in place, they will not be able to continue on an interest-only mortgage when their deal expires.
They will then be forced to look for a repayment mortgage, which is considerably more expensive, and could be either beyond the level they can afford, or beyond the level a lender is willing to give them.
Over 50sFor the over 50s, however, the problem is even more serious. The FSA is also expected to bring in age restrictions, which means no-one will be able to take out a loan unless the deal finishes before they are 75 years old. It means that someone in their 50s switching from an interest-only deal to a repayment one couldn't take a 25 year deal. They would have to pay it off over a shorter period - pushing it even further from their reach.
It means a huge number of the over 50s have no ability to remortgage.
Hit alreadyOne equity release broker has said the effects are already evident among older people. Responsible Equity Release, says that 36% of its clients are already using equity release to fund a mortgage shortfall. That's a huge increase of 31% from 2010. It says that since the beginning of 2012 alone it has also seen the trend accelerate.
Steve Wilkie, Managing Director, Responsible Equity Release, commented:"We have seen a sharp increase in the number of people releasing equity in order to settle a shortfall on an interest-only mortgage. With the vast numbers of interest-only loans due for repayment in the years ahead, we expect to see this trend become even more entrenched. What's effectively happening is that people are having to give away part of their homes to remain in their homes."
You could argue that this time-bomb would always have gone off at the end of the mortgage period, and this is simply bringing that date forward to a time when many homeowners have a chance to put things right.
Alternatively, you could argue that the FSA is needlessly precipitating a crisis that would have been negated by 25 years of average house price rises.
What do you think? Let us know in the comments.