Mortgage borrowers could become mortgage prisoners
Only earlier this month, the Treasury Select Committee criticised the FSA for not doing more to help mortgage borrowers over the age of 50 who have interest only mortgages.
Regardless of the criticism shown towards the FSA, it is a positive step that this issue and interest-only mortgages as a whole are discussed in the public arena.
Why? I personally feel that we will see in the next 3-5 years many mortgage borrowers who simply cannot adjust their mortgage situation. They could become mortgage prisoners – unable to remortgage to another lender if they fall outside of current lending criteria.
In the last three years, since the Bank of England base rate reduced to 0.5 per cent many borrowers have moved away from the mortgage market – remember between 2003 and 2008 when remortgaging seemed to be a national obsession?
However it has created a false sense of security for many borrowers – and the recent changes to lender SVR’s has started to highlight particular changes to the mortgage market that many borrowers aren’t yet aware of.
For example, take some borrowers who are on tracker mortgages that are set a fraction above base rate – they ‘should’ be reviewing their options now, but will they? Or will they choose to wait until base rate shows signs of rising?
All borrowers in the UK should be revisiting their mortgage arrangements in 2012 to see how they fit into the lenders new lending criteria – not doing so could mean that they sleepwalk into problems.
How many borrowers are aware of the changes to interest only mortgages in the last 18 months? With reduced loan to value ratios, and limited repayment vehicles now, could many of those borrowers really remortgage without switching to a capital repayment basis? Could they realistically afford to?
It is important not to forget that as we approached the end of 2011, lenders such as Santander were still offering 75 per cent LTV on an interest only basis without a recognised repayment vehicle – fast forward to now, where the LTV is now 50 per cent - how quickly lending policy can change.
For many borrowers who are over 50, is it financially feasible for them to convert their mortgage to capital repayment terms? More importantly, what procedures do the lenders have in place to assist these borrowers? There could be big challenges ahead for all parties concerned.
For mortgage borrowers below the age of 50, it could be argued that they perhaps have more of an opportunity to revisit the structure of their mortgage and make adjustments – however in some cases it may cause additional financial hardship.
Interest-only mortgages did offer, when planned correctly, a viable opportunity of achieving home ownership for many borrowers – however the current situation regarding them needs to be handled correctly, and very importantly, sensibly.
We have to be careful when dealing with this problem. We are all aware that mistakes were made in the industry, and that some borrowers made decisions which were not in their own long term interests.
What can we do now though? Ask yourself - have you spoken to your clients recently who have interest only loans?
It is our responsibility as advisers to make our clients aware of the recent changes – and how it could affect their future financial planning.
Stuart Gregory is director at Lentune Mortgage Consultancy
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Readers' comments (4)
Really good article and unfortunately true. So many are just unaware of the massive changes lenders are making in the mortgage market...if only all could see the many emails i receive on a daily basis from lenders regarding withdrawal/restructuring/change in LTV's for interest-only mortgages and even repayment mortgages too. The goal posts are constantly moving at the moment..and the public are none-the-wiser.
Whilst I totally agree that there will be mortgage prisoners and that it will become increasingly dangerous for these people as rates begin to rise the sad fact is that most of them have been living in cloud-cuckoo-land for the last 10 years or so. They have purchased houses that their income does not justify and sooner or later the debt will have to be repaid either by conversion to a repayment basis with the acceptance that this will make them work much longer or by sale of the property.
The lenders should have been as vigilant in the past as they are now and no amount of borrower and broker whingeing is going to alter the need for adjustments to life-styles that are required.
This article is completely true, the problem will only get worse the longer people delay converting to repayment, however, they are still unprepared to forego the holidays, and lifestyle choices in favour of security, sadly they are also the ones least likely to be protected with PHI, CIC etc. A serious look needs to be taken by lenders and the FSA regarding the consequences of the new criteria they are rolling out almost daily.
John Lacy - you're right, but we cannot turn the clock back - cannot blame all those that took out mortgages based on I/O payments - the alternative was for many that they wouldn't have bought.
Lenders encouraged this marketplace very aggressively, and now lenders need to not leave Joe Public in the lurch.
Unfortunately the FSA does not have the firs clue when it comes to the Mortgage Market.
If we cannot help people it will come back to haunt us all.