Are we sitting on a mortgage time-bomb?

by Ginger Reynolds on April 26, 2012

Buying a house is for almost everyone the most expensive purchase they will ever make. For most people the only option when buying a house is to take out a mortgage and pay it back over a number of years. This is still expensive though and so many people instead take the option of an interest-only mortgage which significantly reduces the amount which they have to pay back each month. A lot of people are now discovering though that these interest-only mortgages may leave them not owning their own home and also in debt.

So that people paid off part or all of their mortgage as well as the interest, an interest-only mortgage would usually be coupled together with an endowment plan. An endowment plan requires the mortgage holder to pay a further monthly amount but this amount is then placed in different investments which are intended to earn money for them. The idea is that the money earned by the investment opportunities will pay for the outstanding value of the house.

Many have people have now discovered though that the investment opportunities which their money was placed in as part of their endowment policy are not generating enough of a return. The bonds and shares are not as profitable as they were in the past and so people are not making nearly enough to pay off the cost of their home alongside the interest which they are paying on their mortgage.

Due to the investment options from the accompanying endowment not generating as much money as expected a lot of people are unable to afford to buy their property at the end of the agreed term. The other factor in the person buying a house is the rising value of the property but this has also not been as much as expected. House values have even dropped at certain points leaving some people in debt.

What this now means is that a lot of people are finishing their interest-only mortgages and are unable to buy their house. This is leaving a lot of people with the option of applying for a new mortgage or in some people’s case becoming homeless.

Find out more about mis-sold mortgage PPI.

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