Many homeowners with “interest-only” mortgages are facing debt management worries, according to the Financial Services Authority (FSA).
Figures from the FSA show that many of the four million interest-only mortgage holders haven’t made sufficient provisions to repay the amount of their capital sum once the loan expires, and run the risk of developing serious debt management issues.
Their study found that one in three (38 per cent) of Britain’s 11.1 million mortgage borrowers have made inadequate provisions to cover the cost of their property.
Some homeowners could end up suffering with mounting debt problems, as a large number of borrowers are also in negative equity now (where the outstanding loan amount is greater than the property’s worth).
Debt advice organisations have spoken out at the number of enquiries they have received already from customers in need of impartial debt help.
Ivan Cooper, Chairman at leading debt advice firm Chiltern said: “With the current property market falling, people cannot rely on house prices rising to cover their capital repayments.
“For many people, who are already struggling to make ends meet with their interest-only payments, they haven’t enough spare disposable income to increase their payments – once their loans and credit card debts have been accounted for. Some are even failing to maintain their mortgages in a bid to keep up with their unsecured payments.
“In these circumstances, it may be worth seeking impartial debt advice from a reputable debt help provider.”
A Financial Services Authority spokesperson said: “At the top of the market it was the case that for a lot of borrowers, interestonly was the only way they could afford to buy. For these borrowers it becomes increasingly difficult to pay off the capital as time goes on.”
A spokeswoman for the Council of Mortgage Lenders said that homeowners cannot rely on house-price inflation to cover the capital repayment at the moment. “They will have fewer options available if they get into difficulty, as switching to interest-only is a coping strategy when you have payment problems.”
Reputable debt advice organisations, like The Debt People, Hamilton Locke and Chiltern, provide a way to regain control of finances for people who are struggling to maintain their unsecured balances.
These steps to get out of debt range from providing simple debt advice and tips, to offering a professional debt management solution.
Professional solutions include Debt Management Plans (DMPs), Individual Voluntary Arrangements (IVAs) and Trust Deeds amongst others.
A Debt Management Plan (DMP) is a way to regain control of finances whilst still repaying all outstanding unsecured balances. DMPs make finances simpler by gathering a number of outstanding balances into a single manageable monthly payment, which is based on your affordability. This means that the amount you pay each month will always be affordable, as it is based on your disposable income – the amount remaining each month once priority payments have been deducted.
With a Debt Management Plan, you make one monthly payment which is then distributed on your behalf to the people you owe money to. This simplifies finances, as you only need to pay once each month. Payments towards your debts are then rescheduled over a longer period of time, to mke them more affordable, which will be negotiated by the company providing your Debt management Plan.
If your circumstances change and you no longer suffer from mounting debt problems, payments on your DMP can be increased or stopped accordingly. Likewise if your situation changes for the worse and you receive lower income, it can be revised down so that it is still affordable.
An Individual Voluntary Arrangement (IVA) works in a similar way to a DMP, but it is repaid over a fixed period of time. The IVA involves a legally binding agreement with your creditors – which protects you from them chaning their payment demands.
Because the agreement is binding, a qualified Insolvency Practitioner is required to draft your IVA proposal and offer suitable IVA advice and support.
Once the IVA term has been completed, all remaining unsecured balances are effectively written off and you walk away debt free. This allows you to make a fresh start with your finances.
Borrowers taking out interest-only homeloans must have a suitable repayment plan in place, under current guidelines. However, that can be as little as a monthly savings account. Banks would previously allow struggling borrowers to switch to interest-only on the understanding that the move was temporary, although lenders do not have the power to force borrowers to return to a capital and interest repayment mortgage.
For immediate debt advice, or for more information on other debt management solutions, please call the number at the top of this page.