2nd May 2013
The 1.3 million interest-only mortgage borrowers who may not have enough funds to pay back the capital sum on their mortgage have hit the headlines.
But beneath this huge number, it is individuals and families who are at risk of financial hardship or at least seeing their home-owning dreams dashed. The North South divide in property prices may also have a bearing on this situation.
Today Mindful Money carries a note from financial planner Danny Cox laying out six options for those caught out without an adequate repayment vehicle or adequate funds from other sources – all eminently sensible. Yet we think that in some regions – including all three home nations outside England – the options are a little more limited.
Certainly one of those options – downsizing to a smaller, cheaper property could be very difficult where house fallen dramatically or in the case of Northern Ireland collapsed since the financial crisis with a 56 per cent fall from their highs.
We know that is not the case in London or the Southeast of England. That is not to say that it wouldn’t prove traumatic for people to have to sell up in in this region and move somewhere smaller, but at least the option is likely to be there.
It is not all bad news however. Generally, where it has been easier to get on the housing ladder, people will have been less likely to take out an interest only mortgage so the numbers affected should be smaller as John Charcol’s mortgage expert Ray Boulger points out on Mindful Money today.
The Council of Mortgage Lenders and the Building Societies Association are falling over themselves to say that their members will be flexible and try and make sure that people stay in their houses. But it will be interesting to see just how flexible lenders will be in this tough market for converting loans to repayment vehicles certainly at a level which borrowers can afford. The worst case scenario must be that people have to sell up to pay back the capital sum and end up renting again. It is not quite as bad as handing back the keys and still owing money, but it will probably feel like it.
It may be that in areas where prices have fallen back significantly, a interesting option will be to try and build an investment pot. This carries risks of course – more risk if your time horizon is relatively short. But who will offer such plans?
It is unlikely that any big fund manager or insurance company will step up to the plate to offer a plan that is tailored to help people meet their repayment and advertise it widely. The legacy of the endowment crisis is still too fresh in people’s minds.
The onus is on the individual but there is help available. Whether people are considering downsizing, remortgaging to a repayment mortgage or building a pot of money up, it must make sense to seek professional advice on all aspects of your finances. It may well be worth paying a fee for this advice too.
It is much, much better to act now than to let the problem get worse, and the longer people leave it, the more their options may narrow especially in regions where prices are falling.
Finally here is a quote from Unbiased chief executive Karen Barrett, whose website helps you search for this help. She says: “Today’s FCA’s review offers an important insight into the size and nature of the problem borrowers on interest only mortgages may face when they come to the end of their mortgage deals. The research shows that just under half of all interest only borrowers set to repay their loans by 2020 may be left with a shortfall on their mortgage repayments and of those a third are expected to face a shortfall of £50,000 or more.
“It is absolutely imperative for mortgage holders on interest only deals to act now to assess their individual situation and to ensure they are taking action to tackle any potential shortfall. And it is important to look at all possible options, whether it is switching to a different type of mortgage, saving into an extra repayment vehicle or even down-sizing their property. These are significant decisions to make and we would encourage all mortgage holders to seek professional advice to ensure they are aware of their options and that they have them explained to them in detail, to be able to make the right decision for their individual needs. A whole of market financial adviser will be able to look at a borrower’s entire financial situation and they will be able to recommend the most suitable plan of action to ensure the mortgage demands are met. To find a whole of market financial or mortgage adviser go to www.unbiased.co.uk.”
We couldn’t put it better ourselves.