Having pontificated on the relative merits (or not) of interest only mortgages on many occasions, I thought it would be a long time before I needed to consider the subject again. My last article in this magazine on interest only mortgages was in 2013, when the media criticism had reached a then peak. Interest only mortgages are one of those ‘Marmite’ subjects; you either love them or hate them. Views in respect of interest only mortgages seem to be diametrically opposed with no middle ground. Advisers either see them as a flexible way of structuring a mortgage that gives customers many options as to how and when they repay their loan or as an unstructured disaster waiting to happen.
The recent media speculation with regard to a potential increase in interest rates has sparked a new wave of interest only soothsaying. The Independent has been particularly vocal about interest only mortgages using headlines (in the first 2 weeks of this month alone) such as, “Interest-only mortgages: a million face payment problems, yet lenders are still pushing them” and “Interest-only mortgages: A million homeowners are sleepwalking into disaster”. There is little doubt that The Independent’s attention to the subject has been rekindled because of the Citizens Advice new estimate of the number of people who have no repayment strategy linked to their interest only mortgage. Citizens Advice had previously thought that 260,000 people fitted this category, but they now estimate the figure to be around 934,000 – such a number coupled with emotional headlines is bound to spark a new debate. In fact, the detailed numbers and source behind The Independent’s headlines are probably more worrying than the near one million figure. The Citizens Advice press release using Yougov research shows:
- 7 million homeowners say they have no linked repayment vehicle, such as an endowment or ISA.
- 934,000 homeowners have no plan for repayment.
- 432,727 homeowners have not even thought about how they will repay the capital.
Therefore, it is right that there is such a high profile debate and despite the emotive headlines it is also constructive that newspapers such as The Independent and consumer organisations such as Citizens Advice highlight such issues.
Citizens Advice argue it is not enough to simply write to customers asking them what their repayment plans are
Citizens Advice claim that some people they come into contact with say they were not made aware that they would need to repay the capital at the end of their term. Those within the mortgage industry are likely to reject such claims. They know that consumers will have received a Key Features Illustration and mortgage offer, both of which would have made it perfectly clear that the capital would remain outstanding on an interest only mortgage for the whole of the term to be repaid at the end of the term, but that is not the point. The point is there are clearly a number of customers who need expert advice. Citizens Advice is calling upon lenders to take a more proactive approach in discussing repayment options than the lenders had done previously. Citizens Advice argue it is not enough to simply write to customers asking them what their repayment plans are. Citizens Advice argue that such borrowers should be offered face-to-face meetings.
As intermediaries start to consider their 2016 action plans they too could take a more proactive stance with their interest only customers. Any intermediary should know which of their customers have interest only mortgages and it would be a relatively simple task to devise a customer contact strategy to discuss their options. Clearly, concerns about interest only mortgages will not go away and any future rise in interest rates will only make the headlines worse. Apathy may have been the norm in the past, but being proactive should become the new norm.
