There are no shortage of countdown clocks ticking

Tick… tick… tick.  There are no shortage of countdown clocks ticking – for the Olympics, RDR, Solvency II, etc. However, only one of them has officially been branded a ‘ticking timebomb’.

Martin Wheatley, currently of the FSA but who is soon to take over as head of the new Financial Conduct  Authority, appeared before MPs and touched on the issue of whether homeowners with maturing interest-only mortgages have the ability to repay the capital.

He told the Treasury select committee that the issue was a “ticking time bomb that has been created over the last 20 years”.

This isn’t the first time this matter has been raised. Earlier this year the FSA itself included repayment of interest-only mortgages as a ‘potential concern’ in its Retail Conduct Risk Outlook. The issue itself dates back at least 20 years with the sales of vast numbers of interest-only mortgages backed by endowment policies to homebuyers hoping for strong returns.

Poor investment performance and endowment mis-selling dashed those hopes, causing many people to stop investing and to seek compensation. The boom in house prices and laxer lending standards in recent years encouraged more people to choose interest-only as a more affordable option with the idea of moving to repayment when they could.

The FSA expects about 150,000 interest-only loans will mature each year in the decade 2011-20, around £120 billion of borrowing in total. It forecasts about 40 per cent or 60,000 loans a year will not be paid back, in many cases because there is no repayment strategy.

This is of particular concern because it also recognises that the majority of those unable to repay will be aged over 60. Which raises the question, if they are not in a position to repay, when will they ever be?

Yes, some could downsize but our experience is that when push comes to shove, many people are either not ready to leave or are put off by the high costs of moving. The option of just rolling over to a new interest-only loan also seems to be fast disappearing due to tighter lending criteria from lenders and as a result of the MMR.

Equity release is one of the few realistic options mortgage advisers should consider for clients who are running out of time. As one of the main providers, the number of enquiries we are receiving from homeowners facing this problem is already starting to build.

As for other ways to lessen the impact of this timebomb, they are hard to spot. The Council of Mortgage Lenders appears to believe better communication with the borrowers to explain the problem will reduce the size of the blast.

The truth is that borrowers are probably well aware that they have a responsibility to clear their loan, but they do not have the cash and no likely way of getting it in time.

Killing off interest-only mortgages for standard borrowers may be a good policy to head off trouble in the future. It won’t, however, deal with the problems of the present.