Almost three-quarters of homeowners with interest-only mortgages are worried they may not be able to repay their loan, research by Ocean Finance has revealed.
Interest-only deals mean borrowers pay the interest on the loan during the life of the mortgage and then must repay the capital when the mortgage term ends.
The mortgage broker has revealed that just 31% of those interest-only borrowers questioned said they have a separate investment policy in place, such as an endowment or an ISA, to pay the capital.
While 16% said they plan to switch to a repayment mortgage before their current loan ends, 31% said they expect to have to sell their home to settle the outstanding capital.
And a fifth of homeowners said they don’t have a plan in place to repay the capital.
Commenting on the results, Ocean spokesman Gareth Shilton says: “Interest-only has become a time-bomb because so many people took out the products to cut the cost of their mortgage, with no view of how they would repay the capital element.
“Borrowers who have an interest-only mortgage with no repayment plan need to take action.
“It’s advisable to seek advice on whether they can overpay on their current interest-only deal, switch to a repayment mortgage, or use an ISA or pension to settle the capital payment.”
Interest-only mortgages became popular in the 1990s as a way for consumers to afford homes at a time when property prices were soaring.
Lenders often agreed interest-only loans without confirming borrowers could repay the capital owing at the end of the mortgage. By the end of 2012 most lenders stopped offering interest-only deals after tightening their lending rules.
The research shows that just over a fifth of borrowers with interest-only mortgages don’t feel they were given adequate advice about repaying the capital portion of the loan when they took out their mortgage.