The Ticking Time Bomb in Our Mortgage Market
Last week, the UK’s third biggest mortgage-lender Nationwide sounded the death knell for interest-only mortgages. From this week, it would no longer offer interest-only deals to new customers.
The problem is that, for many years, these deals have been the standard way for cash-strapped families and first-time buyers to get on to the housing ladder. Many have taken these arrangements out in the shaky belief that they will somehow be able to pay off their mortgage at the end of its term, which has typically been 25-years.
Concerns have now arisen that interest-only could be the next mis-selling scandal, as many such arrangements are now nearing maturity. Recent figures from the Council of Mortgage Lenders (CML) show that around 150,000 mortgages are due to mature every year until 2020. Between 2011 and 2020, the Financial Services Authority (FSA) thinks that 1.5m such mortgages, worth £120bn, will be due for repayment. The FSA believes that 80% of the borrowers have no repayment strategy, and will enter retirement in debt.
Interest-only mortgages allow borrowers to pay the interest off the loan but not a penny of the actual loan. When the mortgage deal ends, the mortgage has to be repaid. This type of deal now accounts for around 43% of all mortgages out of the 11.2 million mortgages in Britain.
In order to shore up certainty that those taking out loans would re-pay them, Santander is one lender that has gone down a different route. It recently stated that it would allow only people with a 50% deposit to take out interest-only mortgages.
Many, upon taking out the loans, believed that they had a ‘comfortable equity cushion’ because houses increased in value. Down-sizing is, of course, an option; as is switching to a repayment mortgage, if the lender is open to going down that route. However, the fact is that house prices are static or in decline, and many people may have to sell their houses to re-pay the loans.
Many retired people will already be entering their later years with a millstone of mortgage debt around their necks and with no immediate means of repaying it. Many will have banked on a re-payment solution which is no longer available to them - for instance income from a high-yield savings account or dividends on shares, that have failed to materialise in the downturn.
While the situation can be a worrying one, it is important that borrowers speak to their bank or building society at an early stage. Only then can possible solutions be found, critical if people feel that they are, or will be, struggling to pay off their mortgages.
Martin Williamson is Head of Residential Property at Latimer Hinks Solicitors in Darlington. Latimer Hinks has a team of around 40 people serving private and corporate clients. For further information: