At the start of the year the FCA issued a stark warning to borrowers on interest-only mortgages: stop ignoring the problem.
The watchdog is concerned that a significant number of people on such mortgages are avoiding the issue of how they plan to repay the capital when their term comes to
This is despite lenders’ best efforts to contact them offering to discuss their various options.
According to FCA research, some 1.67 million borrowers in Britain are on either an interest-only or a part-and-part mortgage. That is 17.6 per cent of all mortgaged homeowners in the UK. So, not an insignificant number.
In scenarios like this you often find that big numbers are used to scare people into action. But I am interested in the detail of this issue. How many of these borrowers are ignoring their lender not because they cannot repay but because they do not want to? Perhaps the interest-only mortgage model is working just fine for them.
When the FCA issued this warning it also highlighted three interest-only maturity peaks – the first of which we are in the middle of right now.
According to the regulator, it is likely these borrowers have lower mortgage debt, higher incomes and are approaching retirement. They are asset-rich but often about to be income-poor. Particularly where they are coming to retirement, or will be in the next 10 years.
The affordability rules now in place, coupled with the increasing rarity of final salary pensions, mean options for borrowers in this type of situation are far more
limited than they were a decade ago.
The FCA’s recent Financial Lives 2017 research identified that 70 per cent of all interest-only and part capital repayment mortgages are held by customers aged over 45.
Remortgaging onto a term long enough to accommodate the increased cost of switching to a capital repayment deal after this age is not an option with most of the high street lenders, whose maximum age limits are still lower than at specialists and smaller building societies.
Simply repaying the capital over the remainder of the term is also usually impossible. A borrower with an £80,000 mortgage with five years left to run could see payments rocket from £300 on interest-only to £1,500 on repayment, for example.
Yet these borrowers have piles of equity in their homes, they are reliable payers every month and are likely to continue to be.
Received wisdom would have you tell them to sell their family home and downsize. But at the age of 45, perhaps they do not want to do this. It may even be that they cannot. If children are still living at home and going to school, for example, this may not be practical.
Brokers know this. They see borrowers in just this sort of situation all the time. Thankfully, there are more solutions coming to market.
The right lenders are keen to support brokers looking to help the thousands of credit-worthy, hard-working borrowers with equity in their homes, who want to maintain the flexibility their interest-only mortgage offers in terms of controlling monthly outgoings.
When the Mortgage Market Review landed, sale of the property became less frequently used as a reasonable repayment method for interest-only. However, where borrowers have the financial ability to downsize but not the inclination to do so right now, why should they not be allowed to make that choice for themselves?
We also know that the way people manage their finances heading into and in retirement are no longer the same as they were even 10 years ago. For example, it is much more common for borrowers to own a buy-to-let property (or several) to provide income in their retirement given that annuity rates have been dismal for so long.
There is no reason this type of asset should not be included for assessment as a repayment strategy for interest-only.
Offer borrowers choices that work for them and they will come to you.
Alan Cleary is managing director of Precise Mortgages