Citizen Advice has warned that one million mortgage holders have no plan on how to repay and could face repossession.

Research from the charity Citizen Advice estimates 934,000 homeowners with interest only mortgages have no repayment plans for the loan and at the end of the term could have their homes repossessed by the lender.

The Figures are higher than estimates in 2013 from the Financial Conduct Authority (FCA) estimating 260,000 had no plan to repay their interest only mortgages.

Many older homeowners, such as home movers, are not being allowed by their lenders to switch to a repayment mortgage as it is unaffordable or allowed to extend their mortgage beyond the age of 70.

They must either repay the loan in full, sell their house or if young enough are placed on a standard variable rate with higher monthly costs.

Older remortgage buyers are often forced to repay their loan at a certain age such as 70 or 75 and rather than downsizing, they can agree a lifetime mortgage where providers loan to values are higher if you are older.

3.3 million interest only mortgages

Citizen Advice have said there are 3.3 million interest only mortgages in the UK and of these 1.7 million do not have a repayment vehicle, such as endowment or ISA.

Of this amount 934,000 had no plan for repayment and 432,727 has not even thought about how the capital would be repaid.

The average shortfall was estimated to be £71,000 and some of the people were unaware they would have to repay the capital at the end of their term or lenders would require you to repay your current interest only mortgage.

Selling your property to repay the residential mortgage could mean moving to a much smaller property, however, downsizing your home and releasing cash is possible if you use equity release.

See how much you can release using a lifetime mortgage and the interest rate if you need to repay your residential mortgage with this link:
Free equity release calculator with instant results to repay a residential mortgage.

Over the past two decades millions of people have been helped onto the property ladder but since the Mortgage Market Review (MMR) regulations have become tighter to ensure a mortgage is affordable and repayable over the term.

Lenders must now consider a person’s income and commitments such as child care and loans for all new first time buyers, home movers and remortgage buyers. Affordability is stressed tested to ensure you can afford the mortgage if interest rates rise.

This does not apply to buy-to-let landlords as they must have a 25% deposit and show the rental income can exceed 125% of the mortgage interest.

The advantage of equity release is your retirement income is not considered with interest rolling-up over time no repayments are required and repaying the mortgage early is possible if you are expecting an inheritance in the future.

Rules changed since financial crisis

In 2012 the regulator changed the rules to ensure interest only mortgages were not available without a repayment plan and the number of these products sold have reduced considerably.

The Citizen Advice is concerned that people with these products do not have the same protections at the end of the term as compared to mortgage holders in arrears.

Mortgage protocols were introduced three years ago to give lenders a legal obligation to offer alternatives before repossessing a home. This includes extending the length of the mortgage or changing the type of the mortgage to make it more affordable and give people a reasonable amount of time to sell their property.

These protocols do not apply to interest only mortgages.

For homeowners facing uncertainty with their lenders, it is possible to use equity release and the product features of lifetime mortgages offer security such as staying in your home for your lifetime or moving to a new home penalty free.

Gillian Guy, chief executive of Citizens Advice has said it is time to level the playing field so interest only customers receive the same protection as borrowers in arrears when their mortgage term ends.

What are your next steps?

Speak to our London City Mortgage advisers if your lender requires you to repay your interest only mortgage, we can recommend the equity release product and the specialist legal advice.

Find out which providers offer the best features and interest rates if you are repaying your existing residential mortgage using this link:
Free equity release quote with the best features and interest rates to repay your current loan.

At LCM our mortgage experts can source the products with the features to match your needs. Learn more by using the equity release calculator, property value tracker chart and mortgage costs calculator.