We are walking into an interest only mortgage time bomb as a wave of borrowers have no means of repaying the capital borrowed or unable to refinance their mortgage at a time when lenders are pulling their interest only deals. Dean, our resident mortgage expert, explains the problems facing those affected and what they should do. Don’t forget you can contact Dean directly for help by clicking on the ‘contact an adviser’ button below this article.
The interest only mortgage time bomb
There are well over a million mortgages in the UK, where no capital is being regularly paid off, these are known as ‘Interest Only’ mortgages and they first became popular when attached to investment plans like endowments in the 70′s, endowment sales peaked in 1987.
In the 90′s poor performance, lack of tax efficiency and bad publicity put endowments into the public eye for the wrong reasons. People began cancelling and cashing in these policies, some receiving premiums back and compensation where it was proven that they had not received the best advice when they took them out.
Understandably many were and still are reluctant to take advice again, despite the industry taking giant strides to weed out the bad guys and clean up its act. This began the even more risky trend of having no plan to repay the capital at all.
It even became a way of first time buyers getting on the ladder around the turn of the century when some lenders even offered interest only products for the first two or even three years. When the market crashed in 2008 these mortgages created a ticking time bomb for their holders as the regulators wanted much more justification from advisers to prove this was the right route for the individual concerned.
In December 2011, The ‘Mortgage Market Review’ white paper was published and among its many recommendations was one that mortgage lenders, not borrowers, were now to be responsible for ensuring a mortgage balance is fully repaid at the end of the term. That has led to systematic withdrawal of options for those with Interest Only mortgages in 2012, with some alarmingly snap decisions by certain lenders which really are not Treating Customers Fairly.
What are the options for interest only mortgage holders?
So what are the options now? Well, as always there is no ‘one size fits all’ solution on this and the ‘timebomb’ is still ticking. I’ve broken it down into broadly three situations.
1. Mortgage is close to its end date, but your original investment (endowment or other) is not going to repay the balance - Clearly it depends on how long you have to go but don’t make the knee-jerk reaction many had when they heard bad publicity about poor performing investments. Find out exactly how long far short your investment will be, remember you wont be paying the premium anymore. Depending on your age and circumstances, consider taking a repayment mortgage over the shortest period affordable to repay just the shortfall. Remember you may need to take new life cover though.
2. You are financially aware and have provision to repay your interest only mortgage, but your bank wont help you refinance – Not all lenders are the same, Halifax, Woolwich/Barclays and Northern Rock/Virgin Money will still consider a wide range of repayment vehicles (especially if you owe less than 66% of your property value). Be prepared to tell them your life story (in writing) and to jump through many hoops though!
3. You have no credible plan to repay the balance but you still have 15 years or more left on your mortgage or are under 50 years old - Getting an interest only mortgage (or refinancing one) will become harder and harder, consider converting to repayment now, even if it means extending the term of your mortgage, if you can’t afford to do that right now, convert over as much as you can afford. Failing this, consider speaking with a financial adviser to discuss the investment vehicles that are now available.
In summary, don’t panic, you are not going to get thrown out on the street! However, the regulators clearly want to erase interest only mortgages so start planning for a life with a repayment mortgage now if you can. Above all, as always take advice from an expert.