The interest-only mortgage time bomb that must be defused
Urgent action is needed if you are one of the 60,000 mortgage holders who have no means of paying off the capital
Sunday 17 February 2013
Interest-only mortgages once proliferated. In 2006, the final full year before the onset of the world financial crisis, almost one in three mortgages was interest-only. This is now recognised as its high watermark, when a product that was meant to be at the periphery of the market, briefly and dangerously took centre stage.
At the height of the property price boom in most of the UK (inside the M25 excepted), interest-only was the means by which buyers maxed out to get the home of their dreams. As was shown later, many of the checks carried out on incomes were substandard as were property valuations. For a few crucial years, tens if not hundreds of thousands of homebuyers over-extended themselves with a product that was probably unsuitable. We are now seeing the fallout as the expected capital growth has not materialised, so many are left with the full value of their loan to repay.
The first side-effect of the chill winds has been acute tightening of new interest-only loans, with many big providers including Nationwide, NatWest, RBS and Coventry leaving the market. The choice of loans is much smaller than in the past, and the conditions attached are strict.
"This mortgage market has toughened significantly in its approach to interest-only lending, to the extent that a number of lenders have stopped offering it to new borrowers," David Hollingworth of broker London & Country says. "Those that still offer it have generally limited the maximum loan-to-value, often to only 50 per cent, and those that are prepared to go to 75 per cent are likely to run a strict rule over any repayment vehicle."
This may get worse, with the Financial Services Authority introducing stricter new interest-only rules for lenders in April 2014. Nevertheless, it's not impossible to get such a mortgage but many new borrowers figure it not worth the candle when compared to standard repayment vehicles. But it's the fate of those who took on interest-only during the boom years that really concerns financial experts.
"It's not hard to see the roots of the problem. People were drawn by the reduced monthly payments," Steve Wilkie, the managing director of Responsible Equity Release, says. "However, in many cases, they either failed to put an appropriate repayment vehicle in place, invested in vehicles that didn't make the grade or saved too little to cover the debt. Or in some cases, they banked on an inheritance or pension tax-free cash windfall that never materialised."
Late last year, the Financial Services Authority (FSA) warned that of the 150,000 interest-only mortgages a year due to mature between 2013 and 2020, some 60,000 are likely to be in shortfall. Of these, 42,000 will be in the names of people over 60, at or close to retirement, and with narrowed options when it comes to repaying the capital sum owed.
Many didn't have an investment vehicle in place to cover the capital debt, or the one they had was not up to the job – such as a poorly performing endowment product. Research from xit2, the asset management data firm, has shown that of 1.3 million interest-only mortgages set to mature by 2020, about one million do not have a repayment plan in place.
Mark Blackwell, the managing director of xit2, says: "If lenders fail to help these borrowers find a repayment vehicle, it will come back and give them a nasty bite around 2020 when the big batch of high-LTV interest-only loans granted in the mid-2000s mature.
"Eighty per cent of these borrowers have no repayment plan. Plenty of those will be families on tight monthly budgets, with low household earnings and little to no life savings. Many of these borrowers won't be able to pay off their mortgage before it matures and will be stuck in arrears."
But, it seems, only a few lenders are alerting borrowers to the looming financial calamity as their mortgage matures, being unable to remortgage and still owing a huge capital sum on a property that may even be worth less than they paid for it.
Advisers say those on interest-only mortgages should review their situation and, if necessary, take immediate action to lessen any financial hit. Philip Bray from investmentsense has seen a steady increase in the number of clients coming to him with a hefty interest-only mortgage hangover.
"First things first, consider moving to a capital repayment plan, and use other assets to repay the debt. You could downsize, and purchase a smaller property from the equity in their home – admittedly this isn't an option open to all," Mr Bray says.
If the borrower is near retirement – which the FSA says many are – more drastic action may be necessary: "They could use the tax-free lump sum from their pension to repay, or pay down some of, the debt, accepting the fact that they will have a lower income in retirement."
Another option is to invert the "bank of mum and dad" and call on the children. "Work with your children who could take on the mortgage, perhaps on a buy-to-let basis, and pay rent to cover the mortgage payments," Mr Bray says. "This clearly has issues (unless it's a buy-to-let mortgage) when the child comes to get a residential mortgage. It would also mean that any rise in the price of the house could be taxable."
The longer borrowers leave it, the more intractable the debt problem is likely to be. But, as Stuart Gregory, the managing director of Lentune mortgages consultancy, notes, most homeowners are sleepwalking into this crisis. "It is an issue many borrowers are unaware of – as many no longer take an active interest in the mortgage market since base rate fell to 0.5 per cent. Borrowers are unaware of the changes to the lending criteria on interest-only loans for example – which in some cases could restrict their ability to move home in the future."
Experts warn, too, that some interest-only mortgage holders are going to lose their homes. Last week, the Homeowners Alliance said its latest survey indicated as many as 300,000 people fear they could have to sell up after choosing an interest-only deal.
Lenders are owed an estimated £116bn in interest-only mortgages
14 per cent of home loans since 2002 have been interest-only
31 per cent of home loans in 2006 were on an interest-only basis
650,000 interest-only mortgages were granted between 2005 and 2007
21,000 of 303,000 UK mortgages in arrears, are interest-only
Independent Partners: Get fee-free expert mortgage advice and find the right mortgage deal for you.
Crowd-to-let: How crowdfunding sites can give investors a slice of the property market for £500
General Election 2015: How you vote next week could affect your finances
Social tenants locked into energy tariff for 40 years
Winter heating underpayment brings summer pain
Have you won £1m in the May Premium Bonds draw?
- 1 Katie Hopkins gives rare glimpse of sensitive side with heartfelt open letter to her children penned in case she dies from epilepsy
- 2 Rihanna's Met Gala dress took one Chinese woman 2 years to make, was reduced to omelette meme in 2 seconds
- 3 Top Gear: Jodie Kidd, Philip Glenister and Guy Martin 'in advanced talks' to replace Jeremy Clarkson and co
- 4 Frankie Boyle on Scottish independence: 'In the Interests of Unity, F**k Off'
- 5 Florida couple forced to register as sex offenders for having sex on public beach
In defence of liberal democracy
General Election 2015: Post-election 'shambles' looms as 70 per cent of voters say SNP 'should not be able to veto UK government policies'
The Rothschild Libel: Why has it taken 200 years for an anti-Semitic slur that emerged from the Battle of Waterloo to be dismissed?
General Election 2015: UK will be 'run for the wealthy and powerful' if Tories retain power, Labour warns
General election live: SNP suspends two members for disrupting Labour rally
Schools forced to act as 'miniature welfare states' with teachers buying underwear and even haircuts for poor pupils
iJobs Money & Business
£60000 - £70000 per annum + benefits : Ashdown Group: A highly successful, glo...
£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...
£27 - 35k + Bonus + Benefits: Guru Careers: A Management Accountant is needed ...
£40-50k + Benefits.: Guru Careers: A Project Manager / Business Analyst is nee...
Day In a Page
Located in the University area, this semi-detached five-bedroom home is arranged over three floors - there's even a rear garden and off-road parking too.
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
Surrounded by the Western fells, this five-bedroom Georgian home retains many original features including panel-plastered ceilings, sash windows and fireplaces.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B, subject to change of use permissions.
A former period coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, office, kennels and an outbuilding that's currently used as a gym.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
This four-bedroom home has exposed brick chimneys and a vaulted ceiling in a breakfast room that's ideal for summer entertaining - the doors open to the patio and garden.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business