It seems that lenders are being very cagey about how they are going to deal with people who find themselves in difficulty due to taking out an interest only mortgage to buy their home.
The Telegraph reports that lenders are writing to borrowers who only pay off the interest on their mortgage every month so end up not reducing the size of the loan to ask them about their plans to clear the amount when the mortgage comes to an end.
Traditionally with an interest only loan the borrower would have some 'vehicle' by which to pay the loan off at the end of its term. This was usually in the form of an endowment and the reason this was done was because, with projected endowment returns, the overall cost of interest only mortgage plus endowment premiums was less than the payments for a standard repayment mortgage.
As regulations and lenders' criteria were loosened in the housing boom years the number of repayment vehicles that were allowed increased and some lenders allowed people to take out an interest only mortgage with no plan in place at all.
The end result for those on interest only with no capital repayment plan is that they are effectively renting their home from the bank for the duration of the mortgage and may well have to give it up at the end. Not something that either politicians or the PR starved banks want at the moment. People being thrown out of their homes en masse by greedy bankers ……. doesn't bear thinking about. So let's see what develops they say.
The FCA looked into this and found that the lenders had not 'mis-sold' these loans but is worried that this issue is a 'ticking time-bomb' with some having a £50,000 shortfall to find.
From The Telegraph figures from Ascent performance Group put it like this:
• 43 percent of the 2.6 million interest only borrowers have suitable plans in place
• 37 percent will have to sell up, rely on family, sell a second property (if they have one) or switch to a costlier repayment mortgage
• 20 percent (some 520,000) have no plans and no idea how they will pay off the capital amount owing at the end of their mortgage term.
The lenders have said that they will deal with this on a case by case basis.
Borrowers who find themselves in this position should talk to their lenders and take independent financial advice early to look at their options. But the difficulty for many will be that lenders now have much tighter lending criteria (lower LTVs and income multiples as well as maximum ages etc) so remortgaging may not be an option.
While many will sympathise with those borrowers affected, others will say that there are signed contract deeds in place and they should be dealt with accordingly, i.e. leave it up to the parties (and courts if applicable) to sort it out.
But if we know there's a big problem coming it looks in this case as if borrowers, lenders and government are all a bit guilty of sticking their heads in the sand.
But what's the answer? Lenders becoming a form of 'accidental landlord', a government sponsored buy and rent back scheme (probably by a private company) or do we let the repossessions (and the effect that would have on the overall market) fall where they will.