Concerns raised for homeowners with interest-only mortgages » Housing » 24dash.com

Nearly half of people with interest-only mortgages have no investment in place to repay the money they owe, research showed today.

Around 2.9 million homeowners are on interest-only deals, but 45% of these are not contributing to an investment to repay the capital they have borrowed, according to investment group LV=.

Instead 41% of people are planning to repay the money they owe by selling their house and cashing in the equity.

Despite falling house prices, many of these homeowners hope to raise enough money to not only repay their debt, but also to buy a new property.

But research carried out for the group by the centre for economics and business research (cebr) estimates that by the final quarter of 2009 around 16% of people on an interest-only loan will be in negative equity.

Unsurprisingly, people who bought their home closest to the peak in house prices in 2007 are the most likely to find themselves in this situation.

Borrowers have not been obliged to have an investment plan linked to an interest-only mortgage since the early 1990s.

The number of interest-only mortgages taken out has increased substantially in recent years, as high house prices meant many first-time buyers could not afford a full repayment mortgage.

The research found that nearly nine out of 10 of the interest-only mortgages that are not backed by a repayment plan were taken out during the past five years.

Mike Rogers, LV= group chief executive, said: "A previously booming property market led many people to bank on being able 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."

Four out of 10 people with an interest-only mortgage that is not backed by an investment said they could not afford to set any money aside towards repaying their loan on top of the interest they were already paying.

Around 13% of people said they were aware that they needed to find the money to pay off the capital on their mortgage but they did not know how they would do so, while 12% said they had not given the matter any thought.

One in 10 people even claimed they did not realise that they were on an interest-only deal.

The research was carried out by cebr during October and included data from the Council of Mortgage Lenders, Survey of English Housing and Office for National Statistics.