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Opinion piece: Think outside the bubble

The interest-only bubble may be about to burst but there are options available that protect both lenders and borrowers

Figures from Leeds Building Society show that 450,000 people on an interest-only mortgage are about to reach the end of their term.

Almost 136,000 interest-only mortgages are due to mature this year alone, worth almost £16bn. Of those, it is reported that one in four borrowers does not have the means to pay the mortgage off. Yet lenders ensured every interest-only borrower was contacted over the past few years and encouraged to put measures in place if they would be unable to repay.

The one in four who may not be able to pay back their capital represents a huge headache for lenders, which face a potential PR nightmare in enforcing repayment of the money they are owed. Often those reaching their mortgage term are elderly, and may be infirm or have other conditions that would make repossessing reputationally damaging for the lender. But it doesn’t have to be like that.

Many lenders think there are just two options, repossession or forced sale, but there are other alternatives for a successful outcome – and organisations that can help lenders that lack the capability to handle the thousands of cases reaching maturity.

Consultation

Ideally, someone will sit down with every borrower before their ultimate repayment date and look at the risk they present, although often the mortgage has already expired. This means meeting the borrower and finding out what their repayment vehicle is – if they have one – whether it is adequate and whether they know when the mortgage needs to be repaid.

Not everyone who has an interest-only mortgage and cannot pay it off will have no repayment method in place; some will have a method that is insufficient. Everyone’s situation is different, which calls for different solutions.

The next thing to find out is how much the property is worth. The homeowner may have an idea, as may the lender, but a valuation will show the outstanding LTV.

If the borrower cannot pay their outstanding balance, there are several options. If they want to stay in their home, one solution is equity release. This will rely on the borrower having enough equity in their property to convert to an equity release mortgage.

Spicerhaart Corporate Sales is working with a number of equity release lenders that are developing solutions especially for interest-only borrowers and expect this to be a growth area.

Another option is downsizing. This is the solution many people think they will adopt until they are faced with the reality of finding a suitable home. Downsizing can make a lot of sense: the borrower clears their debts and lives in a smaller, more manageable home.

Other options may include moving into sheltered accommodation or supported living.

When managed properly, sometimes the property can be sold with the existing borrowers still in situ. This gives them more time to find another property. For lenders, meanwhile, not only are they seen as more compassionate but the house may sell more quickly and for more money with the existing owners still in place.

Clear view

The most important thing is that both borrower and lender are apprised of all the options. This includes giving the borrower details of charities that can offer them independent advice.

Many lenders will need a fully outsourced, 100 per cent reliable option. Ideally, this will be an asset manager or corporate sales specialist who can meet with the borrowers, conduct a proper fact-find, value the property and then carry out a fully assisted move if it is right for lender and borrower. The asset manager must keep the lender’s reputation in mind at all times while remaining impartial.

Good mortgage advisers are an essential part of this plan because asset managers cannot give advice, only information.

The interest-only bubble may be about to burst but there are options that protect both lenders and borrowers.

David Miller is client account manager at Spicerhaart

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