Interest only mortgage gap looks likely to worsen
A huge mortgage gap affecting an estimated 1.3 million interest only mortgages is revealed by a new survey. It seems that many surveyed were relying on house price increases to meet their mortgage capital repayments.
Interest only mortgage without a linked investment plan were first available during the 1990′s. Before that the mortgagee was required to have either an endowment or some other investment plan linked any to non-repayment mortgages. Unfortunately these investment plans were often woefully inadequate as many later found to their cost.
This latest research, carried out by CEBR for LV=, found that of the 2.9 million interest only mortgages in the UK, 45 percent (1.3 million) have no investment vehicle to repay the mortgage capital. This amounts to a total £74 billion in outstanding loans. It seems the largest increase in this group occurred during the last five years when £66 billion (89 percent) of these mortgages were issued.
Of the interest only mortgage holders with no capital repayment plans, 41 percent were relying on profit from the sale of their property to pay off their mortgage. This figure equates to approximately 530,000 people and accounts for around £30 billion in loans. This represents a problem since many of the recent mortgagees could already be in negative equity while further falls in property values would increase the number effected. 13 percent of the survey respondents believed they were already in negative equity while a further 10 percent didn’t know if their property was worth more or less than their outstanding mortgage.
LV group Chief Executive, Mike Rogers noted how the property boom had led people to rely on making a profit from selling their home to pay off the mortgage and buy another property. Current and predicted falls in the property market meant this was not a viable plan and he commented “We’re concerned that so many of the homeowners we polled appear to have an over-optimistic outlook on their ability to pay off their mortgage capital at the end of the term. Or worse still they are turning a blind eye to the issue.”
The survey also found that 21 percent planned to use investments not linked to their mortgage to repay the capital. It does not reveal how well these investments are performing so even this group may not be as well positioned as it may appear.
More details about the interest only borrowers with no capital repayment plan revealed some worrying factors. Many were banking on using equity from the value of their home to pay off their mortgage with 20 percent planning on using the existing equity built up on their home. 18 percent planned on using future equity they expected to build up in their home. Many were only able to meet interest payments with 41 percent unable to put any additional payments aside. 13 percent knew they had to find money to pay off the capital but didn’t know how they were going to do it. Perhaps the most worrying findings were that 10 percent of respondents didn’t know they were only paying interest and would have to find more money to pay off the capital while 12 percent said they hadn’t given the matter any thought.
For those relying on equity in their home, research by LV= indicates that 456,000 interest only mortgage borrowers may be in negative equity by the end of 2009. The worst affected being those who bought property during the peak of the property boom in the second half of 2007. Of those in negative equity, 41 percent (187,000) are relying on future increases in house prices to repay their loan.
Clearly many interst only mortgage holders are facing difficult times as property values contiune to fall and employment prospects are uncertain. Even those with some type of investment plan to meeet capital repayments may have been adversley affected by falls in many asset classes. Some may argue that they should have known the risks of these types of mortgages, but it’s worth remembering the environment in which these products were sold. The mortgage market was increasinly geared to generating profits rather than managing risk, while frontline sellers of these product were often focussed on comssions. People saw house prices incresase year on year while TV programmes and the media fed the psychology of the boom. For many the fear was “missing the boat” or being priced out and anyoe under the age of thirty five wouldn’t remeber much about the last hosuing bubble and how quickly markets can turn. Interst only mortgages offered a way to get on the property ladder with a whiff of “too good to miss”, sold by eager mortgage providers and brokers. The fact that 10 percent of those in the survey didn’t know they were only paying interest on their mortgage gives an idea of some of the processes at work. While arguments over responsibility and diligence have their place, there are real people behind the survey numbers facing difficult times ahead.
