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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

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.

Member

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.

Member
Graham says:
7 May 2013

why not rent instead of taking out an interest only mortgage? Basically that is all you are doing renting from the mortgage provider but responsible for all home repair costs, tied in to the home etc.
people are responsible for their own actions and far too quick to blame others. In latter years when it was possible to see that endowments are not the answer people are still overstretching themselves with ths type of mortgage. A lot of it comes down to greed and a desire to appear affluent. Look how many people purchase flashy cars on finance/lease instead of actually purchasing what they need.
You cannot blame the banks, they gave the customers what they wanted, the customers who lived well above their means.

Member

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.

Member

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.