Mortgage lending at its highest for six years

MORE than one million people with interest-only mortgages cannot afford to pay them off. How do you avoid falling into this debt trap, and how do you get yourself out of it? Kathryn Gaw looks at the options

We are a nation of aspiring homeowners, flocking to banks to borrow a small fortune for the dubious honour of saying we ‘own’ our home.

You would think that the financial crisis would put us off the idea of owing money to Britain’s toxic banks, many of which are being funded through our taxes anyway.

But new figures released last week show that mortgage lending is actually at its highest level since 2007, when the property market crashed spectacularly.

First-time buyers are leading the way, attracted by lower house prices and Government incentives such as shared-equity schemes.

In an ironic twist, this new property resurgence comes as the previous generation of mortgage-owners approach the end of their interest-only terms with no means of paying off the capital.

According to the Financial Conduct Authority (FCA), more than 1.3 million people will not be able to repay the capital when their interest-only mortgage comes to an end, with the average shortfall amounting to £71,000.

So how do you avoid building up an unsustainable mortgage debt? And if you are already struggling to meet your capital payments, what can you do to avoid repossession?

Affording your mortgage

The low repayments of interest-only mortgages can be tempting, particularly for first-time buyers or people on lower incomes.

For the first couple of years you may want the benefit of making smaller repayments on your mortgage while you spend money on the property, or elsewhere.

But sooner or later, you will have to figure out how you are going to repay the capital when the mortgage term completes.

The best way of doing this is to get into a regular pattern of saving, either in a high-interest, long-term bond, or in an ISA wrapper.

With a long-term bond (10 years or more) your money is tied up for a set period of time, earning a fixed rate of interest.

As a general rule, the longer the term, the higher the interest rate, for instance, while a UK Gilt 10 Year Yield pays 1.92%, a 30-year version pays 3.19%.

No tax is paid on the capital or interest of the bond until it has been fully encashed, so you can time the encashment to coincide with your retirement, when your tax liability will be a bit lower.

If you opt to save through a Cash ISA or a Stocks and Shares ISA, if may be worth choosing one which does not offer easy access to your funds, to avoid the temptation of dipping into your house savings on a rainy day.

If you were to save your full Cash ISA allowance of £5,760 every year, it would take you around 12 years to save up the average national shortfall of £71,000.

Avoiding repossession

If you already have an interest-only mortgage and can’t afford to repay the capital, don’t panic.

The FCA is conducting a review into interest-only mortgages to look for signs of mis-selling. In particular, it is investigating the 600,000 interest-only loans which are due to mature by the end of 2020.

These were largely sold with links to endowment products, which have largely underperformed since the financial crisis.

While the bank reserves the right to repossess your home if you cannot meet payments, it is much more likely that you will end up selling the property, allowing you to release your share of the equity and maintain a clean credit record.

But it can be extremely hard leaving a home which you have lived in for 10, 20 or, or even 30-plus years.

If you are worried about meeting your capital payments, see if you can get a good remortgage deal. Yorkshire Building Society has a competitive 2.19% deal on the market at present, with a 60% LTV.

If you don’t have a 40% stake in your home, Furness Building Society is offering a fee-free 3.09% mortgage on a fixed 3-year rate, for 80% LTV.

You could try to make overpayments on your mortgage, to shore up the value of the capital repayment when you reach your term.

Most lenders allow you to make up to 10% in overpayments each month.

And if you have been seriously disillusioned by the interest-only fiasco, you could always ask your bank to move you to a repayment mortgage.

The repayments will be higher, but you will have some peace of mind.