Interest only mortgages – advising customers on their options
In a post recession landscape, it can be hard to believe that only nine years ago interest only accounted for 30% of the mortgages taken out by first time buyers.1 However, back in the 1980s and 1990s many customers were attracted by the earning potential of endowments that were sold alongside interest only products. Many customers cashed these endowment policies in without changing the terms of their mortgage from interest only to repayment, which means that there are an increasing number of customers now reaching the end of their mortgage term with little means to repay, leaving brokers in a very difficult situation on how best to advise them.
Let’s say you had some customers – Mr and Mrs X. Mr and Mrs X took out their mortgage in 1988, when the expected returns from endowments sold alongside mortgages were an attractive prospect for many customers. The couple took out an endowment mortgage over a 25-year term at a LTV of 95%, and four years in, cashed in their endowment and were compensated. Instead of using their endowment to pay off the remainder of their mortgage and converting to a repayment mortgage, they used the money to splash out on the latest fashionable accessory for their home – a new conservatory.
Mr and Mrs X weren’t worried; after all, property prices were increasing and the conservatory would add even more value to their home. Mr X planned to use annual bonuses to pay off the outstanding mortgage but, as it always does, life got in the way and instead of paying off their mortgage, those annual bonuses went on annual holidays.
Unfortunately for Mr and Mrs X during the recession the valuation of their property was reduced by 25%. They were quickly back to 95% LTV, but were 18 years into their mortgage term with plans to retire in the next 10-15 years. Since the recession the value of their property has risen and they are back to an 85% LTV, but unless they make a significant capital repayment they will not be able to repay their mortgage before retirement.
With research conducted by the Financial Conduct Authority revealing that 10% of customers do not have a repayment plan in place to pay off the capital of their loan2, brokers are going to be faced with an ever growing number of customers like Mr and Mrs X who need new plans to repay their mortgage. With differing needs and circumstances it can be difficult for brokers to know where to begin when advising these customers. For Mr and Mrs X, their options are to downsize or extend the mortgage term, but for other customers a part repayment part interest only mortgage might be another option.
To help navigate the tricky waters of interest only mortgages and the options open to customers without the necessary plans in place to pay off the capital, we will be sharing examples of customers you might encounter as brokers and how they might be best advised. Check back for more case studies on the blog in the coming weeks, or discuss Interest Only mortgages with one of our business development team on 0113 2257722.
1 Council of Mortgage Lenders - https://www.cml.org.uk/news/press-releases/2838/
2 Financial Conduct Authority - http://www.fca.org.uk/news/borrowers-interest-only-mortgage