e-mail Paul Lewis on paul@paullewis.co.ukMore than sixty thousand people a year are coming to the end of their mortgage but still have to find enough money to pay off the capital they originally borrowed. These people have interest-only mortgages where the monthly payments are only enough to cover the interest – they pay nothing off the sum used to buy the home in the first place.
From the 1980s to the early 2000s mortgage advisers and lenders encouraged more than two and a half million people – about one mortgage in three – that an interest-only mortgage was a good idea. The monthly payments were a lot less so it was a way to get a bigger home or a nicer one. The more you borrowed the more the adviser’s commission and lenders were not fussy about how you said you would repay the capital. Earning more, inheriting money, bonus at work, pension lump sum, or cashing in investments were all accepted with little evidence.
But those chickens are now coming home to roost. Every year from now until 2033 between 60,000 and 190,000 people will have to find the capital to repay a mortgage on which they have been paying only the interest. More than 40,000 of them every year will already be over 65. Half of these borrowers do not have an adequate plan in place to repay the capital. And one in eight claim they did not realise they would have to repay it; somehow they thought after 25 years their mortgage would be finished and they would own their home.
Regulator’s
research
These figures come from new research done for the Financial
Conduct Authority. The new regulator wanted "to understand the risk to consumers
when interest-only mortgages reach maturity and borrowers do not have the
capital to repay the balance due." Of course, some people have been sensible. As
interest rates have fallen they have not cut back on their monthly payments, so
each month a bit of the capital is repaid.
One surprising FCA conclusion is that there was no mis-selling of interest-only mortgages. Its new Chief Executive Martin Wheatley told me “This is predominantly a wakeup call, saying you do realise interest-only is exactly what it says: there will come a point when you have to repay capital.” Was there mis-selling? “We have not found mis-selling. That has not been the focus of our investigation.”
Nevertheless, if you believe you were misled into taking out an interest-only mortgage and the need to repay the capital was not made crystal clear, you could try a mis-selling claim. First to the adviser or lender you bought it from, and if that fails to the Financial Ombudsman Service. Beware firms offering to ‘help’ you with such a claim. They will do no better than doing it yourself and will charge you if they fail and much more if they succeed.
Act now
If
you have an interest-only mortgage check how much you borrowed and how much you
owe now. Then check if you will have sufficient to repay the loan at the end of
its term. If you are relying on investments check how they are doing and what
the risks are that they will fall rather than rise between now and then. If you
have savings then make sure they are earning the best interest rate. One source
of capital could be your pension fund. You can take a quarter of it as a
tax-free lump-sum, though that will reduce the pension you get.
Another solution is to take out an equity release plan, taking out a loan against the value of your home which is repaid on your death or when you go into a care home. By using that loan to repay the outstanding mortgage you are swapping one kind of mortgage with another. You can let the interest roll up so it is all paid at the end. With some loans you can pay the interest if you have sufficient income. It is a major step and should always be discussed with a specialist adviser who knows the whole of the market and is a member of the Equity Release Council http://www.equityreleasecouncil.com/home/. Interest rates on equity release loans are higher than conventional mortgages. You will also find that the proportion of the value of your home that you can borrow is quite low. At age 65 you will probably be able to borrow around a third of its value – less if you are younger, more if you are older. That may not be enough to pay off the debt on the interest free mortgage.
If you need to boost your income you might consider going back to work or working longer hours. Another solution may be to rent out a spare room. You can charge a lodger up to £4250 a year without paying tax or even declaring it to HMRC. If you charge more than that then you will have to declare the income but can deduct all your expenses and tax is due only on the profit http://www.hmrc.gov.uk/individuals/tmarent-a-room-scheme.shtml
If you have spare income you should use it to overpay your mortgage each month. But some lenders have limits on how much extra you can pay or may charge you a fee. If so you could put the money aside towards the inevitable day of reckoning. Remember that although interest rates on savings accounts are low, your money is at least safe – subject to the £85,000 compensation limit. If you invest spare money remember there will be fees and charges and always a risk it may not do what you hope.
You should also contact your lender and ask if you can convert your existing loan into a repayment mortgage over the remaining term – it will of course cost you more each month and the closer you are to the end of your term the more that extra will be. Alternatively you may be able to convert it to a repayment mortgage over a longer term. But most lenders will not let you borrow beyond the age of 65 or 70 and will, of course, insist that you have sufficient income from earnings or pension to meet the repayments. Some lenders are being very difficult about such extensions. Before contacting your lender it may be sensible to consult a good national mortgage brokers such as John Charcol http://www.charcol.co.uk or London and Country http://www.lcplc.co.uk. They will know which lenders are likely to be most likely to be helpful if you want to move your mortgage.
The ultimate solution may be to sell your home and buy a cheaper one with whatever balance you have left. But it is not a cost free option. If you pay more than £125,000 for your new home there will be stamp duty to pay – and the rate of that increases from 1% to 3% if the cost is more than £250,000 and to 4% on homes sold for over £500,000. There will also be fees to lawyers and estate agents and a removal firm.
As with all debt problems, act now. The longer you leave it the worse it will get and the harder it will be to find a solution.
e-mail Paul Lewis on paul@paullewis.co.uk