There was a time that interest-only mortgages were viewed as a win/win option because for the term of the mortgage, the repayments were only the interest on the loan. For people looking to buy their own home, they were a lower-cost option that meant homebuyers could buy a higher value property than they could have considered on a repayment mortgage (though still subject to the normal affordability checks) or limited by their own variable income when applying for a mortgage.
For landlords, they were a low-cost, high-profit investment that could be sold to clear the mortgage debt once the repayment period ended. So why did the Financial Conduct Authority refer to them as a “ticking time bomb”?
Simply because not enough emphasis, then and now, has been put on the need for a strategy to repay the underlying debt. According to the Council of Mortgage Lenders, one in ten families has no idea how they will pay off their loan when they reach the end of the term and still owe the amount they borrowed. Even those who have made provisions, such as a feeder account that they can pay extra into or an endowment policy linked to the stock market, may find that the final amount falls way short of the loan. Without the ability to raise the necessary funds, they will have to sell their homes to clear the debt.
Holly Thomas writing for The Guardian notes that interest-only mortgages are: “Seen as one of the worst examples of irresponsible lending in the years running up to the credit crunch, when their popularity soared. The majority of deals were taken out without any proof that borrowers could pay off their debt.” Obviously with today’s tightened mortgage affordability checks, no new interest-only mortgages are being approved without a water-tight repayment plan but that doesn’t help the two million people who have the debt deadline looming and have failed to make any repayments. Nor does it help those who have consistently made repayments into a stock market-linked endowment policy or ISA and are finding the amount is far lower than will be needed.
So what can be done? Taking independent financial advice is the best course of action. For some, there may be time to switch to a repayment mortgage or even for a portion of the mortgage if a repayment ISA or endowment policy has fallen short. For others, it may be possible to apply for a new, more appropriate, mortgage on the basis that property values have risen and circumstances have changed. Downsizing to another property is always an option or negotiating to make overpayments or extend the term of the existing mortgage are viable considerations too. There is another element to the interest-only story however, and that is the number of pensioners facing the “interest-only time bomb” for whom the above may not be possible.
Research by More 2 Life shows 41% of over 65-year-olds, 37% of 65 to 74-year-olds and 56% of 75 to 84-year-olds have an outstanding interest-only mortgage. Naturally, mortgage age limits prevent them from being eligible for a new mortgage arrangement or even negotiate their existing mortgage arrangement; setting up a repayment or endowment or even overpaying may be too little too late and selling may be the only option, provided they are eligible for a new mortgage deal. It is a pretty worrying state of affairs and one which is currently being investigated by the FCA.
For pensioners facing this problem, equity release is a serious consideration – essentially using the value of the property to pay for it. Figures show that £1.25bn has been released from homes in the first half of 2017 alone, that’s £6.9m a day, according to Key Retirement, and it will have been used, amongst other things, to pay off interest-only mortgage debts. Equity release firms are no doubt carrying out due diligence that the mortgage can be repaid in total from their payments (otherwise there may be legal implications over the ownership of the property with the mortgage lender once the occupant passes away). It has also led the Council for Mortgage Lenders to warn that for some, the equity in their homes isn’t sufficient to pay the mortgage debt.
For many reasons, the Financial Conduct Authority was right in its assessment. Interest-only mortgages require a great deal more thought than many were initially led to believe was needed. If you have an interest-only mortgage, or are interested in applying for one, make an appointment with Visionary Finance to discuss your options thoroughly and make informed decisions. As an independent FCA-regulated broker, we will discuss with you the best offers available in the marketplace to suit your personal circumstances.