Back in 2013, the Financial Conduct Authority (FCA) issued comprehensive research on the interest-only mortgage market. Although now four years old – and with fresher data expected later in the year – this research is still of interest, especially considering its wide-reaching implications which I will allude to later.
In its report, the FCA estimated that 600,000 borrowers will see their interest only mortgages mature before 2020; just under half are estimated to have a shortfall, with around a third of these expected to be over £50,000.
Worryingly the FCA highlighted that some borrowers were underestimating the shortfall they would have to repay at the maturity of the mortgage. Around 37% of respondents who took part in the research believed they may not have enough money to pay off their loan, yet estimates produced by the FCA suggested that the figure was closer to half. It is this underestimation that has become known as the interest-only ticking time bomb, where many borrowers would reach the end of the mortgages without the ability to repay the balance shortfall.
The CML, however, reported in May that the issue is being tackled effectively by efforts from the banking community following the Mortgage Market Review and the subsequent regulation.
It reported that the interest-only loan book has been steadily shrinking. In 2012 interest-only mortgages accounted for a third of all residential mortgage stock, however, this has fallen to 21% of all home-owner mortgages as of December 2016, with the CML attributing this fall to stricter lending requirements which now sees fewer than 2% of new home buying loans taken out on an interest-only basis, compared to a peak of nearly 40% in 2007.
Despite this there are still 1.9 million interest-only loans yet to mature – so we’re not quite out of the woods yet.
Whilst the shrinkage of the interest-only mortgage market is good news for some, tighter lending restrictions have had negative repercussions for some members of society, notably those over 55. Unfortunately due to their age, people who fall into this category often find that they have fewer options available to them to exit their interest-only mortgage.
They can be both too old to swap onto a capital and repayment mortgage, the favoured exit for younger borrowers, and at the same time too young for equity release. Sometimes the only option available to them is to sell their beloved family home or use their hard-earned savings and investments to pay off the balance shortfall when their current interest-only mortgage matures.
This will obviously be an emotional wrench for many and clearly the onus is on lenders to provide solutions to these customers who are now in a very difficult position.
Unfortunately, there is still not a great wealth of options available to the over 55s, especially those who would like an alternative to equity release. We hope this will begin to change as the issue increasingly becomes a hot topic. At Shawbrook we don’t see age as a barrier and in response to this issue have bought to market a product that we hope will be a lifeline for this underserved sector.