More mortgages on banks’ books are becoming high-risk. TSB, who used to own Mortgage Express before it was sold to Bradford & Bingley, has admitted that nearly half of its residential mortgage book is made up of high-risk interest only loans- more than twice the amount found at the Nationwide building society.
This news comes as TSB has been sold to investors as a low-risk UK bank that will be able to challenge the market leaders by appealing to a different market of customers. However, industry insiders have described the fact that 45% of TSB’s residential mortgages are high risk as ‘extraordinary’ ‘extremely high’ and ‘eye opening’. Regulators for the mortgage industry became aware of the overall number last year and secured an agreement with the Council of Mortgage Lenders to contact all mortgage borrowers who had loans that were due to mature by 2020 in order to fully warn them of the risk.
The news means that people without effective repayment investments such as ISAs or endowments could actually be forced into selling their homes or downsizing if they cannot pay.
Figures from the Council of Mortgage Lenders show that out of 11.2 million mortgages that were in Britain by the end of 2013, there were 2.2 million interest-only loans with 620,000 that were part interest only. Together these mortgages represented 25% of the total.
The biggest building society in Britain, Nationwide, had managed to bring down its total at the end of 2013 to 21.4% as well as HSBC who gave a figure of 37% in its year-end accounts.
The news is just a harder hit to Lloyds Bank who is having to sell off its TSB arm in order to comply with the requirements of EU watchdogs as a result of the state-aid received by the bank during the 2008 economic crisis, which also forced the closure of Mortgage Express.
So, how does an interest only mortgage work?
With an interest-only mortgage, the whole monthly payment is made up of interest so none of it goes towards actually paying off the loan. The overall mortgage will only go down if you choose to make repayments of capital in addition to the monthly interest payments. This is why interest-only mortgages have lower monthly payments than capital repayment mortgages. However, you will still owe money even at the end of your interest repayment period.
If you wish to get advice on an interest-only mortgage, or you need to be pointed in the direction of a free money advice provider, call the Mortgage Express contact number.