Nearly half of the UK's 2.9 million interest-only mortgages (45%, 1.3 million mortgages) have no specified investment vehicle in place to pay off the capital on the loan.
Borrowers have not been obliged to have an investment plan linked to their interest only mortgage since the early 1990s, so perhaps unsurprisingly these kinds of loans have grown substantially in recent years.
The research, conducted for LV= by CEBR, shows that the vast majority of the £74 billion in loans that have no specified capital payment plan, were issued to borrowers in the last five years (89%, £66 billion) .
Four in ten (41%) of the interest only borrowers who have no capital payment plans - equivalent to around 530,000 people with £30 billion in loans - are relying on selling their home and using the proceeds to pay off their mortgage. However, with recent falls in property prices and further declines predicted, this strategy may be blocked for many people in the short to medium term.
Only one in five (21%) plan to use other investments, not linked to their mortgage, to pay off the mortgage capital at the end of the term.
Mike Rogers, LV= Group Chief Executive comments: "A previously booming property market led many people to bank on being able sell their home, use the proceeds to pay off the mortgage, and still have enough left to buy another home. However, this strategy may have been overturned by current and predicted future falls in property prices. These people should therefore seriously consider investing as much as they can now, and regularly, to help pay off the mortgage capital at the end of the term."
Omnibus research
Additional omnibus research conducted for LV= by PCP among interest only borrowers with no specified capital payment plan, revealed further concerns about a growing ‘mortgage gap'.
Four in ten (43%) said that at present they could not afford to put aside any additional payments, on top of the mortgage interest.
A fifth (20%) said they intended to use existing equity they have already built up in their home to pay off their mortgage.
18% said they intended to use future equity that they expect to build up in their home to pay off their mortgage.
13% said they were aware of the need to find money to pay off the capital on their interest only mortgage, but didn't know how they could do this.
12% said they hadn't given the matter any thought.
One in ten (10%) said they didn't realise they were only paying interest, and would need to find additional money to pay off the capital.
Mike Rogers continued: "We're concerned that so many of the homeowners we polled appear to have an over-optimistic outlook on their ability to pay off their mortgage capital at the end of the term. Or worse still they are turning a blind eye to the issue."
Negative equity
13% of respondents to the LV= study believe they are now in negative equity, while a further one in ten (10%) say they do not know whether their property is worth more or less than their outstanding mortgage.
The LV= research suggests that as many as 456,000 interest only borrowers could be in negative equity by the fourth quarter of 2009, with the worst affected being those who bought close to the peak of the housing boom in the second half of 2007. Four in ten of those in negative equity (41%, 187,000) are relying on future house price increases to repay their loan.
With inflation at a 16 year high, unemployment rising at its fastest pace since the early 1990s and wage rises set to remain moderate, the financial pressures on interest-only mortgage holders are clearly on the up. Even for those people who have savings and investments already, recent market falls and weak global economic growth will mean lower investment returns over the short to medium term.
Mike Rogers concludes: "Providing for those things that matter most in life has undoubtedly got a lot harder in recent months and the current economic outlook will be making many families anxious. However, a little financial planning now could make a real difference down the line. We urge interest only borrowers with no firm capital payment plans to review their options, save as much as they can regularly, and seek professional advice early if needed."
Concern about retirement
Previous research by LV= earlier this year showed that people facing retirement are particularly concerned about how they can protect themselves from the fallout of the credit crunch and the uncertainty that lies ahead.
Two thirds of those facing retirement (66%) said that they had become increasingly worried over the past year about their financial security in retirement.
