Each week, we round-up the best comments, emails and letters to the site and pick one reader contribution as our Star Letter. This week’s award goes to:
Lenders ‘let down’ by brokers over interest-only
I recall the lenders gradually reducing their need for information and proof about the repayment vehicle from as long ago as the 1980s when they began to stop taking assignments on endowment policies.
They gradually shifted the responsibility for having a repayment strategy over to the borrowers themselves, and often failed to check that a plausible arrangement was in place. Naturally, many borrowers when counselled (especially the younger ones) thought they could safely assume they would switch to a capital and interest basis at a later date as their incomes rose, and many brokers supported this assumption – myself included in many cases.
This was a time when interest rates were reasonably high so affording a full capital and interest loan was too expensive – so a compromise was needed if first-time buyers were to get on the housing ladder. First-time buyers struggling is not a new phenomena.
A 30 year mortgage could be arranged on an interest-only basis with the idea it would switch to a repayment plan say five years later – thus eventually ending up with a 25 year capital and interest mortgage. Result: borrowers could buy a house immediately rather than wait until the income had risen sufficiently to afford a capital and interest loan by which time house prices could also have risen significantly too (house prices went up in those days). What has happened since is that despite being warned initially, everyone forgot the importance of revisiting the eventual methods of debt repayment.
When they realised their endowment policies were going to fall short and cashed them in, they spent the proceeds on anything other than reducing the mortgage debt. They missed the obvious point that the reason that the policies were going to fall short was falling returns on the back of falling interest rates – so increasing the mortgage payments to compensate should have been less painful.
Customers changed brokers, and some brokers weren’t strong enough to tell it how it was and that the mortgage payments needed to be higher, Remortgaging was a numbers game, often meaning proper attention to paying the debt off was not given.
The lenders may have relied on brokers to check a repayment strategy was in place, but they were complicit in accepting business where the actual method of repayment was deferred until later. And for many that later has arrived.
Andy Wilson
