Avoidance is not in your Interest
We have had a sustained and long-lasting (by comparison) level of very low interest rates. This has been bad news for those with cash savings, but good for those with mortgages or loans, at least regular “mainstream” ones. However a lot of borrowers have mortgages that are interest-only mortgages. This means that they are only paying the servicing interest each month, not actually repaying any of the loan. As rates have fallen, many have failed to use this as an opportunity to make some progress clearing the debt.
The credit crunch had lots of far-reaching effects on most of us, we are still living with the official Government response to it, which is one of austerity. An attempt to keep expenditure lower than income, which for you and I make a lot of sense, as a nation it ought to, but of course the Government has lots of ways of “making money”.
Anyhow, there are a whopping 1.67m mortgages that are either entirely or partly interest-only. The regulator is rightly concerned that borrowers are not engaging with the problem and without any plan to clear the loan will utlimately be subject to discovering the joys of Court and perhaps repossession of their homes.
70% Ignore the Lender
The research conducted, reveals that a staggering 70% of borrowers that fall into the category of an interest-only mortgage never respond to requests from their lenders suggesting a proper review. This is collective denial on a massive scale. Everyone is presumably hoping for one of several possible outcomes.
- That they have a plan in place that will clear the debt, they simply haven’t told anyone
- That they intend to sell their property and downsize once clearing the mortgage
- That they have every intention of doing something, just never got around to it.
- That the lure of gambling or lottery, cryptocurrency winnings will be the answer
- That they expect the world to end, so who is really bothered…..
As you may have gathered, I’m probably offering thoughts that aren’t written down in the report, though I suspect I’m not far off the truth. Denial is a very powerful force and many people are, frankly taking their future all too lightly.
I will sell up and then rent, what’s the big deal?
Of course selling the property, hopefully for a figure larger than the loan, may work for some, but for others there is unlikely to be much left over to buy a house. So perhaps renting is a consideration, after all, interest-only mortgages are a bit like renting, except the borrower also has all the upkeep and insurance. However, renting is not as easy as you may think. Most agents apply a multiple of secure income (pensions) to determine if the rent is affordable. As a guide, expect to prove that your income is 30x the monthly rent…. most will not be able to do so. If you are over 70, then add in the lack of suitable property and landlords willing to rent to people more likely to fall and hurt themselves… well, let’s just say that renting becomes harder.
As is probably obvious, the regulator is concerned about the lack of engagement. I suspect that this might lead to some new initiatives to “encourage” borrowers to take action. You have been warned.
Dominic Thomas
Solomons IFA
You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk