Around 1.3 million families face losing their homes after taking out interest-only loans they have no hope of paying back.
A probe unveiled by the City watchdog, the Financial Conduct Authority, revealed that many face an average shortfall of £72,000, while 250,000 homeowners owe nearly double this.
Now banks and building societies must write annually to customers and lay out their options.
Tony and Pam Hughes are typical of the tens of thousands of elderly homeowners who face being forced to take on costly extra borrowing because they face huge shortfalls when their interest-only loans become due.
Despite making interest payments for 30 years, the couple were £40,000 short of paying off their mortgage when it ended. But they were determined not to lose their home in Tunbridge Wells, Kent.
They took out a £35,000 interest-only mortgage when they bought their three-bedroom home in 1981.
Later, Mr Hughes, 72, a retired Royal Navy warrant officer, and his wife extended the loan to £40,000 — again on an interest-only basis — to pay for care costs for Mrs Hughes’s mother, but still struggled.
Eventually, in order to stay in their home, they released equity from their £240,000 property through Just Retirement.
They were able to get £58,500 at an interest rate of 6.59 per cent. This cleared their mortgage and gave them extra money.
But equity release is costly: in 18 years, the Hughes’s debt will have ballooned to around £200,000.
‘Being forced to sell up would have been heart-breaking,’ says Mr Hughes. ‘Equity release was the right choice, but if we had given better advice earlier, things would have turned out differently.’
HELP! I’VE GOT A LETTER AND CAN’T REPAYCall your mortgage company now — many have a team dedicated to interest-only problems. If you do nothing, you could lose your home.
Get a second opinion, for example by speaking to a mortgage broker.
More... SIMON LAMBERT: Caught in the interest-only mortgage trap as Britain went property mad Don't get caught out by a home-buying time bomb: What you need to know about picking the right survey Do the maths: The Interest-only mortgage timebomb calculator Can you find a better mortgage deal? Check the best buys and get fee-free advice Could equity release be an option for you? Find out using our free guideIf you can save, start. Put the money in a cash Isa. It’s unwise to gamble it on the stock market if you need the money in a few years.
If you have a relatively small shortfall, ask your bank to extend your loan. You’ll probably have to pay an administration fee.
Some banks, such as Santander, have started making borrowers complete lengthy ‘budget planning forms’.
Borrowers must also attend interviews at their bank.
Banks have been cautioned about indefinitely extending interest-only mortgages for borrowers. Instead, they should consider whether the borrower might be better off taking some equity from their home by having a lifetime mortgage, known as equity release.
If you don’t have too much to pay off your mortgage, you can also consider overpaying. Any cash you put aside will be deducted from the main loan, meaning your monthly interest payments should fall.
Another benefit is that you will no longer be charged interest on anything you pay off, so reducing your monthly repayments.
Finally, you can consider switching to a capital and repayment mortgage — this will pay off your loan the quickest.
Of course, you must be prepared for increases in your monthly repayments. A £100,000 capital and repayment mortgage spread over ten years at 4.5 per cent will cost £1,036 a month, compared to £375 on interest-only.
But rates are low for borrowers with big deposits. It means some could end up paying only a few pounds more on a repayment loan than they did on interest-only.
For example, an interest-only borrower who took out a five-year fix in 2008 for £40,000 — at the average rate at the time of 6.45 per cent — would pay £215 a month.
If they switched to a five-year fix with Norwich and Peterborough BS at 2.74 per cent for the remaining 20 years of their mortgage term on a repayment basis, their bills would rise to just £217.
Banks have been warned not to move borrowers automatically onto repayment deals.
I’M TOO OLD TO REMORTGAGEEvery year between 2017 and 2032, 40,000 over-65s a year will see their mortgage mature. Half of these will have a shortfall — in some cases of more than £100,000.
Yet they will have trouble extending their loan, as most firms will let you borrow only up to the age of 75.
Some smaller building societies are more relaxed about age limits. For example, National Counties BS will allow you to borrow up to the age of 89, depending on your circumstances.
The maximum loan term you are allowed decreases with age. For example, a 70-year-old would be able to borrow for a maximum of 15 years.
Leeds BS will lend up to the age of 80.
RELEASING CASH FROM YOUR HOMEFor many people, equity release may be the only answer — particularly for those who bought their homes in the Eighties and have seen them soar in value.
Banks and specialist lenders are preparing to offer these types of loans to borrowers to tap into equity in their home. This will allow them to take out cash to pay off their mortgage debt.
Interest on the new borrowing can be paid every month or it rolls up every year. The debt — plus any interest accrued — is repaid only when the house is sold.
It is understood that two major High Street banks are planning to offer equity release plans.
The likelihood is these will be interest payment plans. The advantage of this is that home- owners’ debts will stay smaller. However, they will have to keep making payments until they sell the home.
Traditional equity release plans can be expensive. As interest is not repaid every month, it accrues from the moment you take the loan and can often double every 11 years.
For example, take a couple in their 70s who release £50,000 in a lump sum to pay off an interest-only loan on their £250,000 house.
After five years, with 6.5 per cent interest on the loan, they will owe £68,504. After ten years it will be £93,857 — almost double the original lump sum — and after 20 years they will owe £176,182.
With an interest payment plan, you would typically have to pay £255 a month, but the amount owed will always be the original £50,000.
Anyone thinking about equity release should first seek independent financial advice.
IS IT LIKELY I WAS MIS-SOLD?Probably not. It is thought only a few borrowers — the most vulnerable and least financially capable — may have been unaware what type of mortgage they had.
To complain, go to the firm that sold you the mortgage. Then try the free, independent Financial Ombudsman. Do not use a claims handler.
Interest-only Mortgage Timebomb CalculatorThis calculator shows borrowers with no plan to repay an interest-only loan, or whose investments have fallen short, how much extra you may have to find if your lender forced you on to a repayment mortgage.
Details of your mortgageEnter the amount still owed on your mortgage to find out how much a move to a repayment mortgage could cost you.