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What Happens When an Interest Only Mortgage Ends?

Written By On 03/05/2013

It appears that only ten per cent out of over two and a half million people that have taken out interest only mortgages have a strategy to repay their loan. One in eight did not realise they even needed a plan.

In an FCA study, it was revealed that about a third of borrowers surveyed fear they may not be able to repay their loan when it is due. But the Financial Conduct Authority feels they're being over optimistic and the figure is more like a half.

Their chief executive Martin Wheatley advised borrowers

...not to bury your head in the sand and take action now. Mortgage lenders have volunteered to contact their most at risk customers with a 'wake-up call' to highlight the report's findings and what they need to do without delay.

The report said that the FCA was concerned that borrowers did not fully comprehend exactly what was entailed when their mortgage agreement expires and they are due to repay the loan.

A spokesman for Which? said,

We're worried that a significant proportion of consumers say they did not know they needed a separate repayment plan on their interest only mortgage.

Opting for an interest free mortgage as opposed to a repayment with interest mortgage means the borrower pays a lot less each monthly instalment, but none of the capital gets paid. Therefore when the term comes to an end, the same amount that was borrowed still needs to be repaid.

More recently because of the world financial crisis, lenders have more stringent terms and conditions, often wanting to ensure that their potential customer will have sufficient funds to repay.

The Council of Mortgage Lenders said they are intent on making sure that people who have no plan on repaying their loans are given the help they need.