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Interest-only: ‘Some borrowers are physically ill with worry’ – Star Letter 09/02/2018

  • 09/02/2018
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Interest-only: ‘Some borrowers are physically ill with worry’ – Star Letter 09/02/2018
Mortgage Solutions and its sister title Specialist Lending Solutions select the most thoughtful or thought-provoking comment as Star Letter.

This week the accolade goes to Andy Wilson for his response to the post: The future for interest-only mortgage borrowers – Marketwatch.


He said: “I see a large number of older borrowers with interest-only mortgages approaching their end dates who are stressed out by the forceful contact from their lenders requiring repayment.


“Some are physically ill with worry and being driven to distraction by frequent phone calls and letters demanding to know what the borrowers plan to do to pay off the mortgage. Where the house is on the market lenders are calling fortnightly to monitor progress. For some borrowers we have been able to move them to an equity release lifetime mortgage where they will never be under this pressure again, and it is a relief that cannot come early enough.


“However, for many the debt is too large to meet maximum lifetime mortgage LTV’s and the clients have no savings to make up the difference. Their only choice is to sell and trade down or move into rented accommodation.


“When faced with such borrowers in this position a common question I am asked is: why does the lender want us to pay this money back at all just because the original term is ending? We are paying a commercially acceptable rate of interest, and have proved we can afford to pay it even in retirement, so why are they demanding we pay it off? Why would they want to repossess our house when presumably all they will do with the money is lend it to someone else at a similar rate of interest and have to suffer all of the setting up costs?


“I have to confess I don’t really know the answer. In my head, surely lenders could agree a new rate of interest if the current rate is too generous (e.g. an old tracker at some tiny margin above base rate) and then extend the term by a few years before reviewing things again, perhaps having something like a three- or five-year reviewable mortgage term.


“It is unrealistic to extend by a short term but then insist on a capital and interest payment as this creates completely unaffordable repayments, so it needs to still be interest-only in some guise or another. Some will argue this just puts off the inevitable but why does it have to be inevitable if the lender is getting an acceptable return on the loan, and is fully protected against default by the rising equity in the property?


“The Halifax had an excellent product in its Retirement Home Plan mortgage. Interest-only, no set term, and rates on offer that reflected the ‘going rate’ for longer term borrowing. I have a lot of clients on these plans, and they are quite happy ticking over in retirement until their eventual deaths when the properties will be sold and the debt discharged. Halifax are doubtless happy with the return on these loans. They know they will be paid off one day, although they can’t be absolutely sure when.


“This insistence by lenders to actually pay the mortgage off at maturity even if it traumatises the borrowers and forces them to sell what is often their long-term home, and then be forced into rentals because they have insufficient equity to buy something else cannot be in anyone’s interest. It might be helpful to understand why they are so insistent that repaying is the only way forward.”

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