Interest-Only Mortgage Holders Have Nothing to Fear


As a renowned multi-lingual financial expert and author on subjects financial, Merryn Somerset Webb published a book on personal finance for women, Love is Not Enough: The Smart Woman's Guide to Making (and Keeping) Money, we therefore feel justified to quote on her stance towards the property market at present which she first published in The Financial Times.


“Interest -only time bomb”
“Borrowers may lose their homes”
“Home-owners heading for disaster”
These were just some of the headlines that met a study from one of our new regulators, the Financial Conduct Authority (FCA), this week on interest-only mortgages. There were some scary-looking numbers in the study. There are 2.6 million interest-only mortgages due for repayment by 2041.
Confirmed by London estate agents, 48% of people holding those mortgages currently seem they will be short of the full amount when their repayment is due. The average shortfall is estimated at  £71,000 and some 260,000 borrowers have no repayment plan in place.
Sounds nasty, doesn’t it? On closer inspection it isn’t really that big a deal. While it seemed this would be the next big miss selling scandal, it is almost impossible to make a case here.


More than 80% of those who have interest-only mortgages say they fully understood what they were being sold and only 2.5% of holders say they never knew they needed a repayment plan and they still don’t have one.
The most common problem with financial products is, they are complicated and confusing and punters are at the mercy of commission-driven salesmen, but this can't be the case with 'interest-only mortgages', the name says it all.
Most mortgage holder have taken on the mortgage in the full knowledge of its potential pitfalls, yet do not seem much bothered. Paying interest only cost the same as renting a similar house, and with repayment not due for a while, they bargain on good luck and if it does not turn, they will worry then. The good news for these gamblers is, the full force of the government’s financial muscle is wishing them luck with the dice. There are the endless announcements in which the intentions are to “help” the housing market, while all they do is preventing prices in the south from falling to what we might think of as their fundamentally correct levels.



Very irritating for anyone without a house and who wants one, but it’s fantastic for anyone who bought a house with a mortgage they couldn’t really afford: low mortgage rates mean they don’t have to default, and the inflated high prices mean they don’t want to.
Have no fear when our British Government is near, they are likely to do a whole lot more for these risky lenders. Most modern governments follow much the same strategy,  they keep interest rates low and hoping for inflation. Not all countries are good at creating inflation, but the UK is a past master at the game of changing the value of the pound in residents’ pockets.
The CPI in the UK has averaged 3.1% over the last six years which was before Mark Carney arrives to take up his new position as governor of the Bank of England in July. When he starts with his unconventional monetary measures we might find ourselves accepting a rate that halves the value of our money in a matter of 23 years as being a good thing.


At present values the average shortfall on repayment vehicles between now and 2041 is about £71,000 (see above). Should inflation average at 3.1% a year from now, the debt will be down to £38,000 in real terms and if it bumps up only HALF% to 4% it will be down to £32,000. Should Carney get it up to 5% (which seems fair for him) it will be a mere £26,000. When you look at it this way it is hard to see the problem. Inflation is nevertheless a problem for most of us and it will get far more frightening when financial repression (the eroding of debt by keeping inflation above interest rates) will be allowed to continue unchecked.
Hand in hand with the sky-rocketing property prices, ask any estate agent in London most of these guys may easily re-mortgage at the future value of their homes, or sell and make a huge cash profit. Don't people realise how sick and self destroying these devious shenanigans are and to which extent they will worsen? Monopoly remains the name of the Game.