The Council for Mortgage Lenders(CML) has recently provided an update on how the stock of existing interest only mortgages is changing. In 2012 lenders increased their efforts to make contact with the holders of interest only (IO) mortgage, aiming to ensure that as many borrowers as possible can repay the mortgage at the end of the term. So now in 2106 we can see whether this is working.
How much progress is being made?
The CML report shows that the number of pure interest only (IO) mortgages has dropped by 31% from 2012 to 2015. The number of “mixed” mortgages, where part is repayments and part IO has dropped by 29% during this time.
You would expect the number of IO mortgages to decline as some are maturing and very few new ones are being started. However only a third of this decrease has come from mortgages reaching maturity. The rest has come through borrowers switching to repayment mortgages, often combined with using savings to reduce the mortgage amounts or moving and downsizing.
Another positive aspect is that increasing house prices have resulted in more loans having more equity, which can be helpful for those borrowers who intend to downsize at the end of their mortgage.
Overall the report is pretty pleased with the progress so far and expects it to continue:
“with specific interest-only borrower contacts increasingly embedded in lenders’ business-as-usual routines, we expect the book to continue to shrink and improve beyond this, in the same way we have seen since 2012.”
Implications if you have an IO mortgage
If you have an interest only mortgage with no savings plan such as an endowment policy to repay it, this report doesn’t really help you. The report says “A small proportion of interest-only borrowers do not repay in full on the maturity date.” It would be interesting to know what this proportion is, but if you are one of them that’s pretty academic, you still have a major problem no matter how many other people there are in the same situation.
The report says “there have been very few cases reported where all other options have failed and the lender turns to possession as the last resort.” That sounds good, but all it means is that most people decide to sell their houses as having them repossessed is worse.
Lenders rarely offer to extend your interest only mortgage when it ends. You can’t assume you will be able to just carry on making your usual monthly repayments.
See What are your options with an interest only mortgage? for details of what you can do to improve your position and why it’s best to start as soon as possible.
Implications for debt advice
There are still 1.7 million pure IO mortgages and nearly 0.5 million mixed mortgages. Many of them have no effective repayment plan in place. And quite a few of these are ending in 2017…
I think these mortgages are the elephant in the room for debt advice at the moment. They tend to be ignored because they are frequently not the presenting problem that a client has. Unless the mortgage is ending in the next year (or has already ended!) most people don’t ask for help with it.
I wonder if debt advisers are also taking the easy option of ignoring the IO mortgage because they know there often isn’t an easy solution for a client. It’s a question of piecing together a set of actions that together will improve the client’s situation even if they won’t completely solve this. Some of these possible actions cross normal debt advice boundaries, such as thinking about taking money out of a pension early.
But we have to face up to reality – there is no point in trying to come up with a plan to tackle the client’s unsecured debt that will take years to work, if there isn’t a clear way forward for sorting out the client’s IO mortgage afterwards.
Obviously a plan which ignores the fact that an IO mortgage will end in the middle is a bad one. It should be regarded as mis-selling to suggest an IVA or DMP to a client in this situation. A client that is in an IVA is very unlikely to be able to get a lifetime mortgage or even a bad credit repayment mortgage.
But even if the IO mortgage will end after the unsecured debts are cleared, this may well still be poor debt advice. In six years time the client will have 6 less years to save to repay the mortgage, they will be 6 years older and likely to find it harder to get a remortgage for a long enough term to be affordable, and the unsecured debt solution may also have left them with an impaired credit record.
At the very least we need to be asking every client with a mortgage if it is repayment or interest only. Even if the client isn’t ready at that point to look at their long term options, they need to know that it’s important to make some plans as soon as possible and that they can return to discuss this. “You aren’t really buying your house at all, you just have an agreement for 8 years to rent it from the bank,” can get the point over effectively.
But if the IO mortgage is ending within 10 years of the proposed unsecured debt solution, we should be going further and talking through the IO options with the client. And if the client is in a DMP, then the mortgage should be discussed as part of every annual review.