The endowment mortgage trap…

Friday, 06 July 2012

Are you one of the many thousands and thousands of borrowers who were encouraged by their bank or mortgage lender in the early 80’s right through to the end of the 90’s to take out an interest only mortgage?

Well, now that these mortgages are nearing maturity those very same banks and mortgage lenders want their money back… and because of the financial problems that the economy has seen over recent years not many of them not want or are willing to help.

This is particularly relevant for those borrowers with these self-same interest only mortgages who are or have entered retirement, and consequently whose earning potential has or is about to cease. If you are one of these what do you do, especially if your bank or mortgage lender is not very helpful in agreeing to extend the term of your mortgage further – and lets’ face it with a reduced income, you represent more of a financial risk than you did when you were granted the finance in the first place.

Statistics show that nearly one in three mortgage loans that were taken out during this period were on an interest only basis and many of them were backed by endowment policies – these self same policies that were sold to you by your bank or mortgage provider with the promise that they would accrue sufficient value to ensure your mortgage was repaid in full when it matured – and if you were even luckier, those endowment policies might even give you a lump sum surplus to reward you for your financial prudence and planning – a surplus that you could spend as you wish.

Well, we all know what has happened in those intervening years, those endowment policies have not performed anything like as well as they were expected to and those people who have not addressed this problem previously may find that the mortgage they expected to repay will not be repaid and they will be left with a substantial debt which in many cases could be many thousands of pounds.

So if you are one of the many people who now find themselves in this situation what are the options available to you?  Well there are several, but these may not be available to all.  The first, and most simple option is to pay off the shortfall by using other funds or investments that you may have accumulated over the years – funds or investments that you might previously have earmarked to provide you with a comfortable life in retirement. 

If you are close to retirement and are about to convert your pension to an annuity to give you an income for the rest of your life, the tax free lump sum that you are eligible to take at this time could also be used to pay down any mortgage shortfall that you might have – but again this may mean using funds that you expected to help provide you with a comfortable retirement.

Another option is for you to sell your existing property and downsize to a smaller one, repaying any mortgage shortfall from the surplus proceeds that you realise.  However, with a difficult property market at the present time this might not be an easy option for all. The other problem with downsizing is that you are often asking people to leave their family home – a home that has been a big part of their life for many years and one that holds many memories – quite often people can’t bear the thought of doing this.

The other solution is to approach your bank or mortgage lender and see if they will extend the term of the mortgage for you, but this comes, not surprisingly with strings attached.  For example, the mortgage landscape has changed so much over recent years as a result of the recent credit crisis and not only are bank’s lending criteria much stricter but the rules they have to abide by in respect of affordability and repaymentability have been tightened considerably by the Financial Services Authority (the body the has responsibility for regulating and monitoring the bank’s lending activities) which means it is now much more difficult to extend mortgages on the same terms.  

If none of the above are solutions to your problem then there is one final option that is available to you via the equity release market – and this is to either release equity from your property to repay the mortgage shortfall or to switch to an interest only lifetime mortgage.

Because people who are in this situation bought their property maybe 20 plus years ago then they do have one significant advantage, and that is that in almost all cases they will have built up significant equity as property prices have risen over the years.  With an equity release or lifetime mortgage you can choose whether you want to continue to pay the interest as it accrues or whether you want to roll this up into the loan ensuring that it gets paid off when the property is eventually sold.

Whatever happens, if you find yourself in this situation doing nothing is not an option for very long – so our advice is to do just that – take relevant advice and consider whether equity release is appropriate for you. 

Remember, debt is something that will not go away – and it is an issue that confronts more and more elderly people.

Mature Times works closely with the Equity Release Information Centre who offer a free guide on equity release – to get your copy or to simply ask them a question regarding equity release call free on 0800 077 6599.