Interest-only chickens coming home to roost

Tony Hazell

Tony Hazell

Let me take you back to the 1990s when lenders ripped up their rulebooks and decided they no longer needed repayment vehicles assigned to mortgages.

Now the chickens are coming home to roost.

At the end of 2014, the Council of Mortgage Lenders reported that there were approximately 1.9m outstanding pure interest-only mortgages and another 460,000 part interest-only. Many are due to mature in the next few years.

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Action to date has mainly centred on writing to borrowers, informing them of their contractual obligations and suggesting they make contact if they are concerned.

This has been reasonably successful with lenders reporting that many borrowers are tackling their debt.

But there remains the thorny issue of what to do with those who will not have the means to repay.

Lenders and regulators have batted the issue back and forth, but what has become clear is that lenders will not be able to rely on arbitrary age limits to force borrowers to repay or trade down.

It has taken Fos to knock sense into some lenders.

Over the past year it has been dealing with about five cases a month based around claims of age discrimination on lending. And, while each case is weighed on its own merits, Fos has made it clear lenders cannot hide behind the assumption of a general exemption on age discrimination under the Equalities Act.

Although firms can offer products to specific age groups, they cannot make assumptions about individuals because of their age.

Rather they must show that they have looked at the individual circumstances of each borrower and then provide a specific reason why their age should be a barrier to continued borrowing.

Lenders do have to grapple with a number of issues. A retired teacher, nurse or bank worker with a regular pension income is surely just as good – if not better - a borrowing risk as a first-time buyer with a student loan and the prospect of a growing family.

But what if the person receiving that pension dies, leaving their other half with half a pension? What if they suffer mental incapacity?

Will the regulator give the nod to continued lending now but then retrospectively decide such lending was irresponsible?

In the end it comes back to how this problem was created.

There is personal responsibility to repay money borrowed. But from a business point of view, lending to people who have not proved they have the ability and means to repay the capital seems irresponsible to the point of negligence.

It seems inevitable that many lenders will have to rethink their rules and accept that their loan books may hold many older borrowers.

We may even see some lenders entering the lifetime mortgage market, leading to welcome competition.