BDRC Continental’s annual study, The mind of the mortgage market, estimated 1.8 million homes in the UK are on an interest-only mortgage amounting to around 19% of all home purchase mortgages in the UK.
The report found that only 12% of those with an interest-only mortgage said they intended to repay the capital by selling their homes at the end of their mortgage term, representing 216,000 home owners.
Tony Wornell, director at BDRC Continental, said: “Our research suggests that some interest-only borrowers are not engaged with the end game – what will happen when their mortgage term finishes and they have to repay the capital?
“Everyone with an interest-only mortgage needs a credible repayment plan.”
Among those with no investment plan 23% expected to switch to a repayment mortgage while 16% either mentioned selling the property or using cash savings to repay the capital. And 26% said they did not know how they would repay the capital.
Wornell said: “Changing to a repayment mortgage is the most certain solution but if that is not possible borrowers could consider overpaying the mortgage or building up cash savings if they do not like the idea of an investment plan.
“Some borrowers are using a mix of methods to ensure they can clear the capital. Whatever the plan a regular review is important in staying on course."
“It could help if lenders got involved in this review and feedback process rather than leaving it entirely to the borrower,” added Wornell.
