In this article David Foot addresses the issue of interest-only mortgages, and, more specifically, a shortfall of funds with which to repay them when they fall due.
This is inspired by a case that I have been dealing with recently. My client, a lady in her mid-forties, was sold an endowment mortgage; an interest-only borrowing facility with a life assurance and savings plan alongside, intended to provide the requisite life cover, and a tax-free lump sum enough to repay the borrowed amount, and, hopefully, a tidy little nest-egg over and above that.
Millions of these arrangements were sold from the mid-80s to the late ’90s, and by far the majority did exactly that. In themselves, they were not bad, as long as the customer knew exactly what the risks and rewards were, and just as importantly, that they were not to be considered as a ‘fit-it-and-forget-it’ solution to property purchase. They were sold predominantly in times of relatively high interest rates, good stock-market performances, and excellent long-term returns on investments. However, as the ’90s and noughties unfolded, interest rates began to get lower and lower and market volatility became more prevalent. Endowment policy providers were not without blame. Despite recent investments not having performed as well as the long-term holdings, providers of ‘With Profits’ policies were still declaring high maturity bonus rates, safe in the knowledge that they didn’t have many policies maturing (they would have been written in the 60s, when they formed a small part of the market) so final values were very inviting, and the league tables of maturing 25-year policies made good reading (and a good sales aid).
Moving forward a few years, the low interest environment had fed into the Bond markets (in which substantial amounts of the Life Company Funds were invested) and a series of events rocked world stock markets. Providers started to realise that huge numbers of policies were going to mature and that they could not continue to declare the level of bonuses they had in the past. In addition, they were required to advise policyholders that in some cases there may not be enough proceeds from the policies to repay the debt that was originally stated. Those who were advised properly, and those astute enough to make their own plans to remedy the problem, took advantage of the low interest rate environment to increase payments into their plans, overpay the mortgage, or convert some of the interest-only portion into a capital and interest (repayment) basis, thus reducing the burden on the endowment, and, in some cases, freeing it completely to become just a savings vehicle.
This (substantial) preamble, leads me to the case in point. My client came to me for help after she received a letter from her lender asking her to repay the full value of the mortgage debt. She had been mis-sold the mortgage, but there was no-one from whom to obtain recourse, and she had a shortfall. This was compounded by her having been on benefits for some years. She was frightened of losing her home and her fear of speaking with the lenders was making her even more ill. In short, once I had got through to the right person, I was able to arrange for the proceeds of the policy to be paid to the lender and the shortfall to be changed to a ‘repayment’ loan, up to the age of 70. The ‘Support for Mortgage Interest’ benefit will continue to help her with the interest part of the new loan. At any time from age 55 she qualifies for an Equity Release arrangement, should she wish to consider it.
In closing: if you find yourself in a similar situation, or know someone who is, the lenders are obliged to treat their customers fairly and do everything they can to help. Speak to the lender, or ask someone to do so on your behalf. Don’t be tempted to bury your head in the sand, and don’t make yourself ill worrying about the situation: there is almost always a solution to the problem.