UK homeowners facing interest-only mortgage crisis, stuck in homes they cannot pay off

Hundreds of thousands of homeowners who have interest-only mortgages will be unable to pay back their loans when their deal ends and thousands did not even know they had to, the latest figures reveal.

There are now 750,000 interest-only and 245,000 part interest-only mortgages in the UK, according to the Financial Conduct Authority regulator. In total, 12 per cent of homeowners now have these deals.

FCA figures suggest nearly half of the one million people still on interest-only mortgages will not have enough money to repay their lender. Some 22 per cent told the FCA they did not know they had to repay their mortgage when their term ended.

The FCA urged borrowers without a repayment plan to talk to their lender.

Nicholas Mendes, a mortgage broker at John Charcol, explained: “It’s a type of mortgage where you only pay the interest on the loan over the mortgage term. You aren’t required to make any repayments towards the capital element of the loan during this time so your monthly payments will be lower than a standard repayment mortgage.

“The amount you’ll owe the lender remains the same with an interest only loan at the end of the term.”

There are risks, Stavros Theopilou, director in real estate finance and banking at Lawrence Stephens, told i: “When the interest only period expires, or the terms are varied to a capital repayment loan, the monthly payments will increase significantly and this can often lead to payment shock.

“If the value of the asset decreases and the borrower is not paying down the principle loan there is a much higher risk of owing more on the mortgage than the asset is worth meaning potential for negative equity is rife.”

To come off an interest-only mortgage, borrowers have options including refinancing with a new mortgage or making lump sum payments. Typically, people will pay off the original loan amount in one sum at the end of the mortgage term but negotiations for an extension or switching to a repayment mortgage can be available.

However around 195,000 of the one million people still on interest-only mortgages are “locked in” to their current lender. Known as “mortgage prisoners”, these borrowers typically took out a mortgage before the 2008 financial crash when lending rules were more relaxed. “They’re now trapped on pricey mortgage deals unable to switch to cheaper ones mainly because they don’t pass current strict affordability tests,” said Mr Mendes.

A single mother-of-four Rebecca Wendel took out a two-year interest-only mortgage in 2007 on a £284,000 home in Leeds. She borrowed from Northern Rock at a rate of 5.25 per cent but when they went bust and were bailed out by the British Government in 2008, her mortgage was transferred and now, 16 years later, she owes £284,503.

The self-employed hairdresser has tried to switch to a repayment mortgage on a new home but is unable to fit affordability criteria, despite the fact she’d pay less per month.

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Her current mortgage rate has increased to nearly 10 per cent following 14 Bank of England interest rate rises since 2021. Last year Miss Wendel was paying £1,049 per month but now she is paying £2,049 although that is set to increase by £150 in the coming month. She says the new payments make her “feel sick to the pit of my stomach” as she often relies on borrowing money from her mother to keep her home afloat.

FCA figures suggest almost half of interest-only homeowners will not have enough money to repay their lender. Around 22 per cent told the FCA they did not know they had to repay their mortgage when their term ended.

Others are being forced to sell up. Tina Reynolds, 58, who works in sales, has been forced to sell her family home in North Devon after her monthly payments became too much to manage. She told i: “Our disposable income and more is going on the mortgage. We’ve had to use credit cards for food, credit cards for any additional spending – if the kids need shoes and clothes. There’s just nothing left.”

Her and her husband’s, 62, payments have increased from £297 in 2007 to £1,511 today. They often “don’t have £10 spare” and their family have been mentally affected by the financial situation. Mrs Reynolds said: “I couldn’t think straight, I wasn’t sleeping. I couldn’t even use a coffee machine, I was dangerous to drive. I was completely vacant.”

Full-time carer Lee Sapsford, 51, owes £4000 more on his mortgage than he did in 2007 when he bought a semi-detached home in Essex with his wife Lucy. The couple now rely on charities to get by each month after their payments increased from £400 a month to £970.

They are currently on a three-month mortgage holiday – an agreement you might be able to make with your lender that temporarily allows you to stop or reduce your monthly mortgage. It caps their payments at £400 but when the mortgage holiday ends he’ll have to find another £500 a month.

“I don’t know what we’ll do,” he said. “I’m £300 short really. There’s another charity I’m thinking of asking for help but it isn’t guaranteed.”

Mr Sapsford, Mrs Reynolds and Miss Wendel are part of the UK Mortgage Prisoners campaign group which has almost 200,000 members.