Your IndustryMay 26 2016

Helping people meet interest-only loan obligations

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Helping people meet interest-only loan obligations

Most borrowers expected to be able to sell their homes at a much higher value at the end of the term, which would give enough equity to repay the interest-only mortgage, with some left over.

Others invested in endowment schemes attached to the mortgage, which were expected to have increased in value enough to pay off the remaining loan.

However, successive market crashes meant many people’s endowments failed to reach their targets, leaving gaping shortfalls.

In fact, data from Saga’s Equity Release Advice Service suggests 1.8m over-50s with an interest-only mortgage had intended to pay it off with an endowment policy, but the return from this is not going to be enough to pay their mortgage off in full.

There are approximately 600,000 interest-only mortgages set to mature in 2020, with an estimated 10 per cent of mortgages with no repayment plan in place.

The next tranche of interest-only mortgages will reach a maturity peak around 2027 to 2028, as a result of deals sold in the early to late 2000s.

Many will have back-up options even where their intended repayment strategy does not work out as they had hoped FCA

The regulator’s own research in 2013 extrapolated projections to 2027 to 2028. Within this timeframe, the FCA research predicted:

■ 2.6m interest-only mortgages will be due for repayment.

■ While 90 per cent - 2.34m people - have a strategy to repay their mortgage, 10 per cent do not – equivalent to 260,000 people.

■ Estimates produced for the FCA suggest 48 per cent of people do not have the ability to fund the shortfall.

■ Borrowers believe their shortfall will be, on average, £22,100. Estimates produced for the FCA are approximately half these shortfalls are expected to be more than £50,000.

■ Those expecting a shortfall say they will use savings (21 per cent) or downsize (19 per cent) to pay off their mortgage, while 15 per cent say they will remortgage.

Is there likely to be a massive lending black hole as thousands of people potentially careen towards failing to meet their mortgage obligations?

Dean Mirfin, technical director at Key Retirement, warns: “The first major wave of interest-only maturities is naturally the most worrying as those with more years to go potentially have time to plan and do something about it.

“For now, those with maturities looming, time is running out. What we can be sure of is we are seeing more clients than ever with no repayment method at all, nearing maturity and just hiding, hoping something will come up.”

However, Jonathan Harris, director of Anderson Harris, does not believe the problem will be as pronounced. He says: “I don’t think there will be swathes of people unable to repay their mortgages.

“The interest-only lending done was quite historic so most borrowers have had time to sort it out and most will be addressing the issue.”

Andrew Montlake, director for Coreco, agrees. He adds: “Given the low interest rate environment, [seeing huge swathes of people unable to meet their loan obligations] is unlikely in the near future. The interest-only timebomb has been much exaggerated.

“With new affordability rules now in place and stress-test levels as they are, we should not see these levels increase.”

Communication is key

The FCA also believes the outcome may not be as bad as the statistics suggest. A spokesman for the FCA comments: “Typically these are individuals with relatively high incomes, high assets and high levels of forecast equity in the property at the end of the term, so many will have back-up options even where their intended repayment strategy does not work out as they had hoped.”

However, the spokesman warns just because people have “back-up options”, the potential for a shortfall should not be treated with complacency.

She says: “Many borrowers, particularly those whose mortgage is due to be repaid in the next few years, will need to take control of their mortgage repayment planning now.”

And for those 10 per cent expecting a shortfall in 2020 and beyond, the industry is working to communicate well ahead of “D-Day”.

The FCA spokesman adds: “To that end, the FCA, the Council of Mortgage Lenders and the Building Societies Association worked together to ensure lenders contacted their borrowers to prompt them into checking their plan for repayment is on track and they are considering the options available to them.”

Key Retirement’s Dean Mirfin says: “The unknown unknowns are the worry. All lenders were asked to write to their interest-only customers to ask if they did have a repayment strategy in place.

“The worry is those who do not, have not necessarily responded at all to the mailings.”

It is therefore important for advisers and providers to keep in communication with their customers.

Mark Howell, director of marketing and customer management for the Bank of Ireland, says: “While the concerns over certain borrowers being able to repay their loan at maturity are real, the industry has done much work to ensure borrowers are aware of their obligation to repay the loan and to offer them support where necessary to put solutions in place for the term end.”