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Interest-only mortgage shortfall: could your home be at risk?

Interest only mortgages

Nearly half of those with interest-only mortgages set to mature before 2020 face a shortfall at the end of their mortgage deal. Have you saved up enough to repay your interest-only mortgage?

It’s been a week of grim news for mortgage holders. First, thousands of Bank of Ireland customers suffered an interest rate hike on their ‘lifetime’ tracker mortgages.

Then, on the same day, new research from the Financial Conduct Authority (FCA) shows thousands of people with interest-only mortgages set to mature before 2020 haven’t put enough money aside to repay their mortgage debt.

Falling short on mortgage debts

If you’ve still got years before you have to repay your mortgage, it’s not the end of the world – you’ve still got time to make provisions. We also think it’s good news that the FCA is taking action before this becomes an even bigger problem.

However, the news is worse for anyone approaching the end of their mortgage deal in the next few years. According to the FCA, nearly a third of those with shortfalls on mortgages due to mature in 2020 are expected to owe more than £50,000.

Some people will have other savings and investments tucked away that can be used to plug the gap, but many aren’t so lucky. With nearly half of people worried about mortgage rates and a third expecting their finances to get worse in the next year, the outlook looks bleak for some.

We’re calling on lenders to take action to help borrowers. Lenders should communicate clearly with their customers and explain all the options available to help them. It’s essential that customers trapped on their current mortgages are treated fairly, and lenders must show leniency to people who are struggling financially.

Time to think about the future

But borrowers have responsibilities too. I took out an interest-only mortgage in 2000 and, I admit, I didn’t put as much aside in a repayment fund as I should have. Luckily, I benefited from rising house prices and was able to repay my debt when I sold the property. Had I bought a few years later, the picture would have been very different, as I might’ve found myself in negative equity.

To alleviate the problem, we believe the FCA should require banks to request evidence from customers on a regular basis that a suitable repayment plan is in place.

If you’re facing a shortfall, make sure you speak to your lender as soon as possible. If you’re struggling financially, it might also be worth seeking free debt advice or an independent mortgage adviser to see if you could switch to a better deal. This problem isn’t going away on its own.

Comments
Member

We like many people took out an endowment on the advice from a building society.
It was well known that it would pay off our mortgage and also give us a nice little bonus at the end.
AT NO TIME WERE WE WARNED THAT IT MIGHT NOT PAY OFF OUR MORTGAGE.
Our mortgage has just come to an end and we have had to find over £20,000 even though we got some compensation.
25 years ago, £20,000 was a lot of money, and had we known we might have to suddenly find this amount we would certainly not have taken out endowments.
A lot of fuss has been made about claiming back PPI, but endowment shortfalls seem to get overlooked with a load of excuses from the banking community.
It makes me angry that we hear of all the disgusting bonus payouts, that in my view is just legalised stealing, when ordinary people who have put their hard-earned money in these institutions have to suffer.

Member

Hi alfa, I’m really sorry to hear you’ve had such a bad experience with your mortgage endowments. My parents have exactly the same problem.

However, if you think you were mis-sold your endowments, there might be something you can do about it. Use our guide to find out if you have a claim – and if you do, we explain how you can make a complaint.

Member

We did claim but they don’t refund you for the full shortfall.

Member

Bad news about people, mostly in the south of England, who perhaps irresponsibly took out interest-only mortgages on their main home, and I’m glad to hear the Financial Conduct Authority (who?) are looking into it. However, if the banks’ response is to cut down the number of interest-only mortgages available to buy-to-let customers in the rest of the UK, as seems likely and has happend to us, that just strangles the private rental market outside the south of England. Is this a good thing? OK, ask for lower loan-to-value ie larger deposits, but don’t just stop offering interest-only mortgages altogether until the problem in the south of England blows over (which might well take a few years).

Member

Hi Alan, the Financial Conduct Authority (FCA) is the new financial regulator. It took over from the FSA on 1 April this year.

Member

I took out a repayment mortgage at around the same time my sister took out an endowment mortgage. It was spelt out clearly that there was no guarantee that the endowment would pay off the mortgage and provide a bid pot of money at the end of the term but that was the estimate based on past returns. I decided not to take a gamble but my sister liked the idea of a lump sum at the end of the mortgage. Both our mortgages ended a few years ago, hers with a £25k shortfall. She did not claim that the mortgage was miss sold as it was explained to her as it was to me that there was no guarantee of paying off the mortgage or receiving a bonus. Therefore, there is no just cause for a claim.

We are all paying for the financial institutions reimbursing PPI customers and I hope that we do not have the same problem with mortgages. It is time people took responsibility for their actions. Mortgages are the biggest financial transaction they are ever going to undertake and they must do so with caution.

Member

I think it’s going a bit far to suggest, as Alan S does, that people were perhaps irresponsible to take out interest-only mortgages. I expect most mortgagors took a balanced decision with the benefit of advice [although there was no doubt some undue pressure in a number of cases]. The original ‘endowment’ mortgages linked to a life assurance policy, and the ‘low-cost endowment’ type that included some capital repayment, were predicated on the likelihood that [a] the mortgagors’ financial position would improve over the term while repayments more-or-less flatlined enabling them to make additional capital repayments, [b] the life assurance policy would out-perform the forecast, and [c] ultimately the value of the property would increase such that there was no risk of a capital shortfall. Eventually – under pressure from the rising price of houses, ever more favourable earnings multipliers, and the demands of the buy-to-let sector – these types of mortgage gave way to the high loan-to-value and interest-only loans – not always tied to insurance policies. With hindisght we can see the snares along that road and that it would stoke up problems for the future if family incomes took a dive, if equity markets [under-pinning insurance yields] stagnated, and if house values declined. But it all seemed perfectly responsible at the time, just as being a long-term renter seems reasonable [if not unavoidable] today. A lot of people were caught out when their endowment failed to redeem their loan. The plight forecast by the FCA for the next two decades is probably more serious because more adverse circumstances come into play but at least the warnings have been given and people might be able to take avoiding action. For many, their children might be off their hands and they can at least downsize or relocate to a lower price area if they have to surrender part of their equity in order to repay the loan..

Member

There was no gambling or irresponsibility in ours or our friends cases who are in the same boat.
Our parents had endowments and got their bonuses, there was no warning that the mortgage might not be paid off at the end of term, the mortgage advisor told us an endowment was best, we had never heard of problems with endowments before and our lack of knowledge of the financial world were the contributing factors.
How many people would really risk losing their property if they knew their mortgage might not be paid off at the end of the term?
If you were warned 25 years ago that you might have to find another £20,000, would you really have thought that in 25 years time that amount wouldn’t be a problem?

Member
Figgerty says: