The sands of the interest only clock are about to run out

We are all familiar by now with the pension time bomb; it has been rearing its ugly head in the news for years.

However, we are less familiar with another time bomb that has also been ticking away over the past 20 years or so and which is now going off in people's faces up and down the land.

I am talking about the waves of interest-only mortgages taken out in the late ‘80s and early ‘90s that are now approaching term; nearly one in three loans written at the time.

The problem, which will affect hundreds of thousands of people over the next few years, is that these interest-only mortgages are approaching term with significant shortfalls.

There has been a sharp rise in the number of people with a shortfall in their mortgage over the past two years.

In many cases the shortfall has been upwards of £50,000 and in some cases it has been well over £100,000.

It is not hard to see the roots of the problem. People took out interest-only loans as they were drawn in by the reduced monthly payments.

However, often they either failed to put an appropriate repayment vehicle in place, invested in vehicles that did not make the grade or simply saved too little to cover the debt. Others banked on an inheritance or pension tax-free cash windfall that never materialized.

It did not help that, in many cases, lenders offering these loans were not exactly vigilant in ensuring suitable repayment vehicles were in place - quite the opposite in fact.

Once again, this crisis has come down to the short-termism that has been endemic to financial services - people creating products without paying attention to how things will look further down the line. But that's another story and a very long one at that.

Many lenders are frantically mailing their interest-only customers reminding them that their mortgage is approaching completion and asking if they have the funds to repay it.

There is real anxiety in the higher echelons of the banking industry that the interest-only timebomb could hole them under the waterline just as they are getting back on track.

So then, what are the options for people facing a shortfall?

One is to pay the loan off with funds from elsewhere, although in most cases we find that people with shortfalls do not have any other savings.

Option two is to downsize, although unsurprisingly many people find that idea abhorrent, having lived in their family homes for so many years.

The only other option, which is often the most palatable to people, is to release equity or switch to an interest-only lifetime mortgage, actively lending into retirement years. That way you at least get to keep your home.

Fortunately, many people who purchased a property 20-plus years ago will have equity in their home due to the long-term rise in property prices.

It is worth noting that one question that a lot of people ask their banks is whether they can simply extend the mortgage for a few more years.

However, according to the CML, the number of people switching over to interest-only mortgages without specifying a repayment plan fell from 251,000 in 2007 to 51,000 in 2011.

This figure reflects the more stringent application of the FSA's approach to affordability and credible repayment plans, making it much more difficult to extend on the same monthly terms. The last thing people need in today's retirement climate is a higher mortgage bill.

Besides which, the banks are under pressure to maintain capital adequacy and commit to new lending, forcing their hand to stick to the original terms in existing contracts.

The most important thing is that people take action and seek to resolve the issue and as soon as they can.

Debt, these days, is just as much an issue for the older generation as it is the new.

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If you perhaps have a friend or relative in this situation and think that  they may well benefit from sitting round a table with someone to talk about it , as a qualified Equity Release Specialist I would be more than happy to help.

As always , thanks for  your attention.