There is a mounting crisis within the mortgage market.
Thousands of borrowers with interest-only mortgages are approaching the end of their mortgage term, which means they will need to pay the outstanding capital on their loan.
But the regulator, the Financial Conduct Authority, has admitted it is “very concerned” that a large number of them do not appear to have any idea how they are going to clear that balance, opening them up to the risk of losing their homes.
The thing is, interest-only has been seen as a timebomb in the mortgage market for a long time. So how is it that we are still no closer to defusing it?
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‘Everyone should have an interest-only mortgage’
When I first started as a journalist, it was writing specifically about mortgages. I know, dream job right?
I’d been doing it for about a month when I went to cover an event in Edinburgh, interviewing a host of mortgage brokers about the property market.
This was March 2007, so the crash hadn’t hit yet and these brokers were bullish.
One of them was effusive in his praise for interest-only mortgages, and actually made the argument that everybody should want one really.
He was clear about the logic – you work out what the repayment would be on a normal repayment mortgage, and stick the difference between that and your actual interest-only bill into a savings account each month.
By the time you come to the end of your term, there’s no reason that you won’t have enough to cover the outstanding capital, and have a bit of extra cash left over at the end too.
Sounds perfect, doesn’t it?
But he was also very clear about precisely why it would never happen – many borrowers simply lacked the discipline to keep this up.
They would instead just cover the interest-only repayment each month, leaving the question of how to clear the outstanding capital for another day.
That session has stuck with me ever since, not least because he has been proven correct.
The interest-only timebomb would be no such thing if borrowers had actually demonstrated a little discipline and had a plan on how to pay off that capital. Instead, we are slowly walking headlong into a crisis.
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Banks aren’t blameless
Now, that doesn’t mean that lenders are entirely without blame.
There’s no question that they were far too happy dishing out interest-only mortgages in the build-up to the financial crisis.
It seems incredible to think that any lender would hand over a loan the size of a typical mortgage without asking a few questions about exactly how the borrower planned to repay it.
The market was performing strongly and there was plenty of competition around, so they got lazy.
Why would you borrow like this?
But I find it equally shocking that anybody would want to take out a loan of that size without having a plan themselves on how to repay it.
And when it became clear that actually having some sort of plan in place would be a good idea, simply burying their heads in the sand rather than coming up with one or at least speaking to their lender about their options.
Yet that’s precisely what a large number of borrowers with interest-only mortgages are doing right now.
Lenders have been ordered to contact their customers with outstanding interest-only mortgages to find out what sort of plan – if any – they have for repaying what they owe.
And if they don’t have one, these lenders need to be proactive in helping them come up with something that will see them pay off the debt and remain in the property.
The trouble is that engagement rates are low.
In other words, these borrowers are not responding the letters.
There are currently 1.67 million outstanding interest-only mortgages, around one in every five home loans in the UK.
If even a fraction of those borrowers don’t know how they will clear that debt, that’s already a hell of a lot of people.
It’s not too late… yet
This is a crisis that has been avoidable every step along the way, and can still be sidestepped – but only if borrowers accept that they have a problem and do something about it.
Maybe you don’t want to think about it, or you’re embarrassed at the thought of having to phone your mortgage lender and say you need help.
I’d be embarrassed making that call too.
But I’d much rather face that embarrassment and come up with a way to keep my house, rather than risk losing everything.
Doing nothing ensures the worst possible outcome is also the most likely one.
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