Helping clients to help themselves

If advisers were to give clients advice on debt repayment at the outset of their mortgages it could save them from getting into difficulties a few years down the line, says Brian Murphy

In most areas house prices have risen at a faster rate than average earnings. The effect of this has been that many of those people who struggle to get onto the housing ladder – or those who want or need to move further up it – have been forced to commit a higher proportion of their net disposable incomes to buying the properties they want.

One of the ways people have found to deal with this predicament is to opt for interest-only mortgages with the intention of reducing their outgoings in the early years of their deals.

A look at the Council of Mortgage Lenders’ website shows that in 2002, 15% of all mortgages were arranged on an interest-only basis. Of these 40% had specified repayment vehicles and 60% had no such vehicles attached. In 2005 the overall proportion of interest-only mortgages had risen to 26% and of these only 15% came with specified repayment vehicles – 85% had none.

I don’t want to be alarmist but advisers must ensure their clients understand all the implications of adopting this approach to interest-only deals.

Undoubtedly many clients have every good intention of having their mortgage on an interest-only basis at the beginning, with a plan to convert to a capital and interest repayment mortgage a few years on.

Responsible mortgage advisers who build and maintain dialogues with their clients and put the effort into sustaining relationships with them will be sure to constantly remind them of the effect of not converting their loans, or at least not arranging alternative repayment vehicles.

They will also highlight the longer-term potential cost implications of delaying that planned change.

But the truth is that some clients never seem to find the right time to make the change. Good intentions, established in the initial year of a client’s mortgage plan, can be quickly forgotten if unplanned changes occur in other areas of their lives.

For example, the arrival of children ahead of schedule or the reduction of a joint income to either a single salary or part-time earnings means the additional cost pressures of converting their mortgage to a repayment basis make the plan unrealistic.

As an industry, we should work towards ensuring that clients take a little more notice of their responsibilities when it comes to overall debt repayment. It could be that some customers just need a bit of advice at the outset of their mortgage deals to help them modify their aspirations, which could otherwise be storing up bigger problems for them in the future.

I might be worrying unnecessarily. Many clients – particularly today’s first-time buyers – could be the recipients of wealth from the baby boom generation in the form of significant inheritance payments from relatives.

This wealth will allow them to significantly reduce or even pay off their mortgages. but this is not a given for all individuals, and advisers should continue to advise their clients based on their individual circumstances.