Millions of us have taken out loans worth hundreds of thousands of pounds each to buy homes – yet a high number do not fully understand the calculations behind them, a study suggests.
A poll carried out on behalf of the University of Nottingham asked 2,000 participants four questions concerning basic principles behind mortgage lending. See the questions below to see how you fare.
Those who have a standard mortgage product answered an average of 2.57 out of the four questions correctly, while those renting answered 1.64 questions correctly on average, the survey found.
However, the researchers were most concerned by a third finding: people with alternative mortgage products – such as interest-only mortgages – answered the fewest correctly, at 1.56 out of four on average.
In fact, the questions they struggled most with were those that specifically addressed the principles of interest-only mortgages.
Researchers suggested the lack of understanding could have 'extremely serious' implications, noting that concern over consumers' grasp of such products has been growing ever since the collapse of the US sub-prime mortgage market helped trigger the economic crisis in 2008.
Interest-only mortgages are those that require the borrower to pay only the interest on a loan each month, but not the capital.
Borrowers with this type of mortgage have to find another way to pay off the capital at the end of the term.
Once upon a time this was largely done through endowment investment products. However, when these began to fail to deliver on a massive scale in the late 1990s and early 2000s, at the same time as house prices were booming, banks and building societies stopped insisting interest-only borrowers took them, or another repayment plan out.
A large number of borrowers now have sizeable mortgages that they have no way of paying off, beyond selling their home when the loan's lifetime ends.
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