New research from the insurance company LV=, formerly Liverpool Victoria, has raised concerns over the increasing number of interest only homeowner loans and secured loans which are being taken out at the moment.

More worryingly is the fact that out of all of these borrowers, somewhere in the region of 1.3 million people who have taken out an interest only loan do not have any form of repayment vehicle to clear the loan at the end of the term. This accounts for a total loan amount of £74 billion and most of this lending has been granted in the last five years.

Traditionally, when a borrower had an interest only home owner loan, their lender would usually insist on some type of investment to be assigned to the loan in order to repay it at the end of the term. Originally this was usually an endowment policy, but this was later extended to PEP’s, ISA’s and personal pension schemes. Nowadays, lenders do not require borrowers to have any such product and many people are simply not bothering taking such a plan out in the first place.

The research has shown that 41 per cent of borrowers with interest only loans are depending on the value of their home increasing sufficiently to be able to repay the loan on the sale of the property, an optimistic view in the current economic circumstances. Of those people interviewed for the survey, 40 per cent claimed that they did not have any disposable income available to be able to repay capital, 12 per cent said that they had not really thought about the matter and alarmingly, 10 per cent claimed that they did not know that they were only paying interest on their loan.  

Mike Rogers of LV= said “A previously booming property market led many people to bank on being able to 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.”