Short-term lending is solution for borrowers with outstanding balances at mortgage-end – Rubins

After 25 years of paying back the loan to the building society – after often many years on a standard variable rate – the final monthly instalment would be paid, the balance settled and the house owned outright. Borrowers could celebrate with a bottle of bubbly as they studied first-hand the deeds to their property.

Nowadays, things are often very different and don’t provide a reason to open the fizz. Sadly, many people reach the end of the mortgage term with an outstanding balance which they are unable to settle; and a large number can’t remortgage either.

Rise and fall of interest-only mortgages

Of course, the largest single cause of this predicament is the interest-only mortgage. While they came to prominence in the 1980s with the rise of the endowment mortgage, their popularity lasted longer than endowments and the subsequent mis-selling scandal.

While the figures are steadily reducing, the most recent statistics from UK Finance show there were still 908,000 “pure” interest-only homeowner mortgages outstanding at the end of 2020.

The good news is that the number of interest-only loans set to mature by 2027, the second tranche of interest-only loans identified by the Financial Services Authority (FSA) in previous research, shrank by 56,000 in 2020 to 457,000 loans, a fall of 10.9 per cent; but that still leaves an awful lot of borrowers who could find themselves facing a serious issue over the next five years.

Options for borrowers

The sad fact is that, despite all efforts to convince them otherwise, borrowers generally don’t believe their mortgage lender won’t offer to refinance them at the end of their term.

If they have adverse credit, are deemed too old or don’t have the requisite income, then the borrower may simply not be eligible for a term extension. And other lenders may equally be put off as well.

So what are the other options available? Firstly, a property sale. If the borrower has another property which they could sell then they could use the proceeds to pay off the mortgage. If not, then they could sell their home and downsize. However, this option may take many months.

Other options may include using a pension, savings or other investments to raise finance. Unfortunately, many borrowers will simply not have enough (or any) of these in order to make up their mortgage shortfall.

The only real option is to sell up and downsize or rent, but time has run out.

A moment of reckoning will be upon the borrower before they know it. They can quickly find themselves being informed by their mortgage lender that possession proceeding have been started. One frantic phone call to the lender later and they will realise that the mortgage company is not being vexatious, but simply following the procedures it is required to do so by the regulator.

Short-term lending can provide ‘breathing space’

All is not lost, however. In such circumstances, short-term lending can be the solution. The use of a regulated bridging loan can provide much needed breathing space for the borrower to find a suitable solution rather than make a distressed decision. They will then have a window for a broker to possibly find a longer-term finance solution (such as a retirement lending product) or it will give them time – up to 12 months – to sell the house.

At Alternative Bridging Corporation, we come across many such cases. So long as a lender can be assured of the exit strategy, they can act quickly to stave off possession proceedings and keep the borrower with a roof over their heads.

This is just one of many real-life scenarios that bridging finance can play its part in solving and can provide genuine reason for celebration.