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Up to 300,000 cash-strapped households have switched more than £60bn of mortgage debt from repayment into risky interest-only deals over the past three years to help cover their living costs.
Analysis of Financial Services Authority (FSA) data demonstrates just how desperate families have become as they contend with what Mervyn King, the Governor of the Bank of England, has described as the most dramatic squeeze on family finances since the 1920s.
With the average UK mortgage at £109,000 and average borrowing costs at 3.5pc, switching from repayment to interest-only saves households roughly £230 a month. But although the move may help families with their immediate cash-flow problems, concerns have been raised about how the debts will be repaid. Darren Winder, UK economist at Oriel, said: “For someone who’s trying to alleviate monthly cash flow pressure, moving to interest-only makes sense. But it does raise questions about how that loan gets repaid.”
From other sources, it appears that three million borrowers are on
interest-only mortgages, which is about a quarter of all mortgages.
Lender forbearance – where banks shift homeowners onto
interest-only deals, extend their mortgage term, or even permit payment holidays – now accounts for 63pc of all troubled home loans, according to the Financial Services Authority (FSA).
Although forbearance can help households, the FSA is concerned banks are using it to flatter their numbers by reducing bad debt provisions. In a guidance note on “forbearance and impairment provisions”, it said: “We believe that there is scope for considerable improvement in firms’ interpretation of the disclosure requirements.” A spokesman added that “there are concerns” about banks’ use of forbearance.
Companies including Taylor Wimpey, Persimmon and Barratt have injected huge sums into the market in the form of shared-equity schemes to help customers get on the property ladder.
Details of the massive sums housebuilders have had to carry on their balance sheets came as it emerged the Council of Mortgage Lenders is coming under pressure to ease the supply of finance to first-time buyers by reintroducing 95pc mortgages.
Figures from the Home Builders Federation (HBF) reveal that £835m of shared equity loans were made available between January 2008 and February this year, resulting in 28,000 sales. Under the schemes, housebuilders help customers get together a deposit to buy homes.
The Government has also supported the market with it own shared-equity schemes including HomeBuy Direct and FirstBuy. Much of the shared-equity funding supplied by housebuilders has been done in partnership with Government schemes.
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