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

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.

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..

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?

I was also told that an endowment mortgage was best for my situation, by three mortgage companies. I could borrow more money with an endowment than a repayment as the payments would be lower, but none of them would guarantee that the mortgage would be paid off at the end of the 25 year term, nor would I be guaranteed a bonus, so I did not accept this was the right mortgage for me. However, my sister took the risk because she liked the idea of a large bonus at the end of the term.

I do not invest in stocks and shares as I do not wish to risk my capital. I am risk adverse in financial matters. If I did invest and lost money, I would nor expect to be compensated. I saw endowment mortgages in the same light, there are no guarantees. My mortgage interest increased to about 17% in the course of the mortgage and I had to increase the payments regularly to ensure the mortgage would be paid in time. I received regular statements of my mortgage, showing how much was still owing and when I increased my payments towards the end, the statement showed the new mortgage end date. Now my sister also received regular, review letters, which told her whether the mortgage was on track to meet its target amount. When she saw there would be a problem in repaying her mortgage she had to use her pension lump sum (I think) to pay the outstanding amount.

As to Interest Only mortgages, there’s a clue in the title. You are only paying off the interest and the capital is not being paid unless you make other arrangements or have equity in the property to enable you to pay off the capital. I feel sorry for those who took out this type of mortgage because it was the only way on to the property ladder. I suppose some will be able to convert to a repayment as they find they are able to make bigger monthly payments. Many others are ‘buy to let’ property owners who have bought many of the properties young people would normally have bought.

Back in the 1980’s I took out a “NORWICH UNION CASH SECURITY PLAN”
I took it out as security for when I retired and expected to get at least £49,000 even £60/70,000 if I was lucky.

It is now with Aviva and called “WITH PROFITS ENDOWMENT”.

It was very misleading in the way it was named and represented and I was fairly naive about finance.

From the lastest projection, I am going to get £14,625.11 at maturity, not much more than I will have paid in.

So what has happened to my investment. It has been invested in shares, property, bonds, fixed interest, etc. Are the people handling my money so incompetent they cannot give me a reasonable return for my investment?

You might see why I call endowment shortfalls legalised stealing especialy when it was announced that although executives bonuses are frozen, Aviva director Pat Regan would get £500,000 bonus this year and the new chief executive is getting £5.68m in base salary. These amounts are obscene when they treat their customers so badly.

I switched from a repayment mortgage to an endowment mortgage in the late 80s when this was recommended and many others did the same. The attraction was the surplus funds that would be available at then end of the mortgage term. I was well aware that the surplus could not be predicted, but at no time was I made aware that I might have to pay any more money. Towards the end of the mortgage period, I started receiving letters warning me that I might have to meet any shortfall.

When my mortgage matured I received a modest payment of the surplus. I still feel cheated because switching from a repayment mortgage resulted in a substantial increase in the monthly payments.

I feel very sorry for those who have to find a lot of money to make up the shortfall.

It seems pretty clearcut to me that anyone taking out an interest-only mortgage was effectively renting their property, but with the option to buy at the end of the term at the price when the property was first purchased. So much better than renting. If they wish to buy they should have saved. They have had the benefit of living in a house at a reduced cost for many years. I don’t see any mis-selling likely here.