End of problem? Well sadly, no – or at least, not for a significant minority.
At BDRC Continental we recently concluded an in-depth study of interest-only borrowers for one particular lender. What struck us more than anything else was the sheer diversity of the situations and plans we encountered.
For a few – the asset-rich – mortgage debt clearance was a non-issue: just shovel some of your assets into the debt hole and that’s it, job done, pretty much any time you fancy.
Among the less fortunate, there were many sensible toilers, making monthly overpayments or contributions to an investment plan. But there were others whose ‘plan’ would not pass muster as an effective and disciplined course of action to achieve the end-goal.
At the extreme were the desperately sad victims of all the bad stuff that life throws up: divorce, illness, redundancy, depression – sometimes several at once – blowing them hopelessly off course.
Others told us they had a plan but then admitted that it wouldn’t produce enough money by the due date. Some of these viewed ‘end of term’ as notional and believed you could you just carry on past it, paying interest. An interest-only mortgage, said one, is like ‘posh rent’.
Some people just didn’t get quantities or distances. One borrower’s plan to clear his interest-only mortgage was to switch to a repayment basis. But he left asking about it until just a few years from end of term and was then quite indignant when told it would cost more than his entire monthly salary to switch to a repayment basis at that time.
Some were very alive to – even panicked by – the issue of debt clearance. Others seemed to live in a Walter Mitty world where they knew that it was their responsibility to clear the debt but that did not translate into any concrete action, beyond perhaps vaguely hoping that property prices would rise enough to clear their negative equity, allowing a property sale to clear the debt.
In short, many interest-only borrowers need help. They need feedback and encouragement. They need ideas. Part repayment, part interest-only, for example, is not well known (it is often an accident not a strategy), yet it could play a very useful part in lowering the height of the debt repayment hurdle. Some will need sensible flexibility at end of term – it would surely be madness to enforce end of term if another one, two or three years of progress will clear the debt.
Potentially, this all adds up to a big job for lenders and advisers. But a job that is in the mutual best interests of both interest-only borrowers and their lenders.
Tony Wornell is director at BDRC Continental