The ticking interest-only mortgage timebomb: Millions of owners at risk of not being able to afford their home
Borrowers with no plan to repay cut-price interest-only loans, or whose investments have fallen short, risk being forced to sell when their mortgage expires. Some like Walter Harper will have to leave homes they have loved for decades.
Walter Harper has lived in his beloved home for two decades — but last July he was forced to put it on the market. He shared the Luton bungalow with his wife and, after she passed away, his partner, and has watched his grandchildren play there.
But he is being forced to move because he owes £110,000 on an interest-only mortgage that he can’t afford to repay. Instead of spending his last days in the house he loves, he will be forced to rent elsewhere.
Forced to sell: Walter Harper plans to rent near his daughters and their children as he can't afford to repay his mortgage
Like so many others caught in the interest-only trap, Mr Harper is being forced to leave his family home because of an investment that performed far worse than predicted.
‘I had hoped to own my home by now. This wasn’t what I planned for my retirement at all,’ he says. When Mr Harper took out his mortgage, he was also saving into a with-profits pension.
In 1997 he was told this would eventually be worth £276,000, allowing him to take £69,000 as a cash lump sum to pay off most of what he owed. But when he retired in 2008, his pension was worth half this amount, leaving him £78,500 short.
He plans to rent near his daughters, Lesley and Tracy, and their children. He’ll use what is left from the house sale to supplement his pension income.
How the interest-only timebomb started ticking
Mr Harper’s tale is far from unusual. There are almost four million homebuyers in Britain with interest-only mortgages. With these mortgages, borrowers pay only the interest on the loan, but don’t have to pay back any of the capital on the property. This happens when the loan matures, usually at the end of 25 years.
Interest-only deals became popular in the Seventies when people were attracted to them because they looked cheap in comparison to loans where you repaid the capital as well.
Homebuyers planned to pay off their capital by using money from an endowment — a type of savings plan linked to the stockmarket.
In the Eighties and Nineties, interest-only loans boomed, driven by commission-hungry bank salesmen who promised huge profits on the endowments.
People were sold a dream that taking one out would not only pay for the mortgage, but also provide them with a handsome lump sum, which they could spend on the holiday of a lifetime and a car. Now thousands, like Mr Harper, who believed this sales pitch have been caught out.
And how the property boom made it much worse
In the housing boom of the late Nineties, a different problem emerged. Homebuyers took interest-only deals as they were the only way of stretching wages to buy a house. Many of these desperate homebuyers now find themselves trapped.
This is what has snared National Trust recruiter Dee Wadham. She took an interest-only mortgage in 2004, just as the property bubble was about to peak. She bought a one-bedroom cottage in the Cornish village of Par for £120,000 with her partner.
Trapped: Dee Wadham is not sure how she will repay the £68,000 she will owe when the mortgage term ends in 2021
After they separated, she bought him out and took an interest-only loan so she could afford the mortgage on her £17,000 a year salary.
As house prices rose, she took on a bigger mortgage in order to renovate the house. Her monthly repayments on the £68,000 loan are £185, but this wipes out a huge chunk of her take-home pay.
Dee is not sure how she will repay the £68,000 she will owe when the mortgage term ends in 2021. Her hope is she will be able to extend the mortgage term, but she will be 64 when it matures and banks are reluctant to lend to older customers these days.
Another option is to pay off chunks of capital as and when she can. ‘At no point did anybody say to me: “There is no way you can afford to pay back that amount of money.” I am sickened and worried about the future,’ says Ms Wadham.
Just how bad is the trap?
City watchdog, the Financial Services Authority, has warned of an interest-only timebomb for 1.3million people whose mortgages mature within the next eight years.
But industry trade body the Council of Mortgage Lenders is playing down the concerns. It says most of those caught in the interest-only trap have benefited from years of house price growth and so can use this equity as a way of paying off their loan.They also believe many will have savings to pay it off.
It’s true that many borrowers have large chunks of equity.
Despite recent falls in some parts of the country, since 1987 average property prices are up 279 per cent. This should give the average homeowner at least 75 per cent equity. But even the banks have wised up to the risks of homeowners banking on property price increases to pay off their loans.
New rules make it difficult for customers to use this as a way of trading up the ladder. This threatens to affect millions of younger homeowners who bought before these restrictions came in to place.
The major problem hitting now is that lenders are bringing in increasingly stringent rules on who can have an interest-only mortgage. Those who do not meet them can keep their interest-only deals but will be forced off them if they need to move home or remortgage.
For someone with a £150,000 mortgage over 25 years at four per cent, moving from interest-only to repayment will send payments up by £300 a month, from £500 to £800.
FACT
"At Heart Finance we search the entire market in order to help you find the best deal you possibly can. We are committed to offering our customers the highest possible
standards of service
We recognise that both we and our customers have everything to gain if we look after your best interests and treat you fairly in all aspects of our dealings with you
Only recommend a mortgage or financial services product that we consider suitable for you and that you can afford – Our lenders charge the lowest fees of all - and always the most suitable from the available options "
A rise in my home's value will let me repay it
Chloe Halstead, 26, took an interest-only deal in 2009 when she bought a three-bedroom semi in Ewloe, North Wales. A repossessed property, it cost a knock-down £80,000 — and while house prices in the region have been falling since then, hers is now worth £110,000.
Optimist: Chloe Halstead plans to sell soon to buy a bigger house
She chose an interest-only loan, like many first-time buyers, because it dramatically reduced her monthly payments.She plans to sell soon to buy a bigger house. Though experts say Ms Halstead may find herself trapped by the new mortgage rules, she is confident about the future.
‘I’m not worried about paying the capital because I know I’ll be able to sell at a profit,’ she says. ‘Interest-only is very handy for people looking to invest in property and I hope the banks don’t take away these loans completely.’
Her optimism is typical of many youngsters who sign up for interest-only loans.
Mortgage brokers still believe these are an excellent way for those on low incomes to take their first steps on the property ladder — as long as they start to make capital repayments, or savings, after a few years.
The problem is many don’t. And years later they are forced to turn to friends and family, or the banks for help. Many rely on an inheritance to pay off their mortgage.
In 1990, Allan Keith Dixon, 58, and his wife Maureen, 62, took out a £100,000 interest-only loan for their bungalow in Tyne & Wear. They also took out an endowment policy, but this failed dismally. Their house is now worth £325,000, but they don’t want to sell. Instead they will extend their mortgage term until they receive a windfall from a relative.
‘We will just keep paying our mortgage until we receive our inheritance,’ says Mr Dixon, a retired teacher who became a mortgage adviser.
How a cheap deal became a financial disaster
Why did people take out interest-only deals?
From the Seventies until the turn of the century, interest-only mortgages were the most popular type of loan. Most people were attracted to them because they looked cheap by comparison to capital repayment deals.
At a rate of 4 per cent, interest-only payments are £500 a month on a typical £150,000 loan, compared with £792 a month for someone on a capital repayment mortgage. The difference is that interest-only borrowers need to pay off the capital part of their loan when their mortgage term ends — typically after 25 years.
Largely, homebuyers planned to pay off their capital by using money from an endowment — a type of savings plan linked to the stockmarket. In 1988 alone, more than one million homebuyers took interest-only loans. In 1992 three out of every four mortgages taken by homebuyers were interest-only.
Though the popularity of endowments began to decline after the year 2000 a new trend began to emerge — a rise in the number of homebuyers taking interest-only loans who had no idea how the capital would be repaid.
As house price increases raced ahead of average wage rises, first-time buyers saw interest-only deals as a way of getting a foot on the property ladder. Many had small deposits, but interest-only deals allowed them to cut their repayments and borrow more. In some years, as many as one in five of all first-time buyers used this arrangement.
What’s the problem?
City watchdog the Financial Services Authority (FSA) has warned 1.3million borrowers whose interest-only loans mature between now and 2020 that they face a ‘ticking timebomb’ — they have no way to repay the loan. Its data suggests there are 320,000 interest-only borrowers who have missed or were late with at least one mortgage payment. Its fear is that if homeowners can’t even afford the interest on their loan they will never be able to repay the capital.
On average, homeowners with loans maturing in the next 12 years will have to pay off £59,000, according to trade body the Council of Mortgage Lenders (CML). More than 2.5million households will see their interest-only mortgage mature after 2020, with an average debt of £155,000 to pay off. Many of those with loans maturing may have never put savings in place to pay them off.
Others may have started with good intentions and put money aside, but ended up using this for childcare, school fees or other living costs. Thousands more have seen their savings plans, typically an endowment, deliver far less than expected.
The vast majority of endowments sold alongside mortgages were with-profits policies. Many whose policies mature this year were told to expect upwards of £100,000 from their plans — based on a £50-a-month saving by a man who took out a policy nearing his 30th birthday. But returns have nosedived by as much as 44 per cent in recent years.
Weren’t people warned?
Many were. Those relying on endowment policies to pay off their mortgage receive a projection letter from their insurer every two years. These are colour-coded — red if a shortfall is expected, amber if a shortfall is likely, and green if the policy is on track to pay off the mortgage.
Despite this disappointment, some took action and put aside alternative savings. But this was not possible for those on already-stretched budgets.
Many consumers won redress for being mis-sold an endowment, on the grounds that the risks were not properly explained to them. This cash was supposed to be used to help them pay off their mortgage — but many simply saw it as a windfall and spent it.
Many borrowers missed the deadline to claim redress, and others never got the chance because of complicated regulations governing who sold them the loan. Recently banks have been writing to interest-only customers reminding them to make plans to pay off their capital.
From the Mail Online
Heart Energy is a market leading Business Utility Broker, Specialising in the commercial Electricity and Gas markets we search for the best deal but charge you absolutely nothing. We work for you, not the suppliers. We take your utility business to several providers and use our buying power to make sure you get the best price available.
