Trapped: There are almost two million borrowers with interest-only mortgages
Almost two million borrowers with interest-only mortgages face having to sell their family home if they can’t repay the cash over the next 15 years, a major probe by Money Mail has found.
It is the legacy of years of irresponsible lending by banks and homeowners burdening themselves with debt they can’t repay.
Ten years after the collapse of Northern Rock, the former bank which pioneered this type of high-risk borrowing, hundreds of thousands are still suffering after being lured in by aggressive salesmen and brokers who were paid huge commissions.
Northern Rock’s call for help from the Bank of England was a landmark for the mortgage industry. It led to the first run on a bank in a century, and thousands of desperate customers lined the streets outside branches to try to rescue their cash.
And while the full extent of the crisis was not known for another year, the lasting effects are still being felt by homeowners a decade on.
Our research lays bare how rules put in place after the collapse have made it almost impossible for many people to secure a mortgage today.
While the strict new rules have good intent, responsible borrowers, who have never missed a repayment in their lives, have now also been locked out of the market.
The number of mortgages approved by banks has more than halved from nearly 3.3 million in 2007 to below 1.5 million last year.
Older borrowers are being told to repay their debts by the time they are 65, even though their guaranteed pension income more than covers any repayments.
The self-employed — particularly those who have recently gone it alone — are stranded as specialist deals for them have been pulled.
Many homeowners have become ‘mortgage prisoners’ and are stuck on costly interest rates because their lender won’t let them switch.
And first-time buyers are having to find enormous deposits to stand a chance of getting a mortgage.
HOW THE BANKS SHUT UP SHOP
A decade after the collapse of Northern Rock, it’s easy to forget just how easy it was back then to get a loan. You didn’t even need to prove how much you earned.
If you didn’t have a deposit, were approaching retirement or even had a bad credit rating, then there was still a deal for you.
The crash began quietly in July 2007 when a French bank closed two investment funds over fears of a growing debt crisis in the U.S.
Soon after, investment markets froze. This hit Northern Rock, which relied on them to fund its booming mortgage business. It called for cash from the Bank of England and on September 13 was bailed out.
Northern Rock’s business model had allowed it to develop a particularly risky type of loan — the Together Mortgage. It would lend 125 per cent loans (i.e. 25 per cent more than the person was actually paying for their home) and homebuyers could borrow up to six times their salary.
Similar deals followed with Alliance & Leicester, Bradford & Bingley and the mortgage arm of Halifax, all offering loans over 100 per cent.
All this came to an end after the collapse and the Together Mortgage symbolised the worst of the excess. In a major shake-up of the British mortgage market, the City watchdog forced lenders to conduct more detailed checks on borrowers.
This included checking what borrowers spent on childcare, food and eating out, but also how much they spent on luxury items such as steak, wine, and even bikini waxes.
Banks also started to ditch loans that were deemed risky by the regulator — including 100 per cent loans, mortgages for older borrowers and ‘self-certification loans’, where you didn’t have to prove your income.
WE HAD TO MOVE TO PAY OFF TOXIC 125% MORTGAGE
Mark Cooper and his partner Liz Rusted were forced to relocate their family to pay off their crippling Northern Rock Together Mortgage.
The couple had paid £189,000 for a one-bedroom flat in London in 2006.
They had a £15,000 deposit but used the loan’s top-up feature to borrow an extra £30,000 to consolidate some debt.
These mortgages were notorious for allowing homebuyers to borrow up to 125 per cent of the property value. In this case, the couple borrowed 108 per cent.
Victims: Mark Cooper and his partner Liz Rusted pictured with children Kaitlyn, nine, and Tamsin
When their first daughter, Kaitlyn, came along two years later they realised they needed a bigger home.
But they were told they couldn’t take the Northern Rock mortgage to a new property. They were able to switch the main home loan to Nationwide, but under the terms of the Together Mortgage the top-up loan had to stay with Northern Rock Asset Management (NRAM) where the interest rate rocketed from 5.99 per cent to 13 per cent.
Over the next five years, Mark and Liz, 42, paid £16,000 to NRAM, of which £15,500 went on interest, and cleared just £500 of the actual loan.
Mark, 43, who works as a business development manager for a charity, says: ‘The repayments were crippling and we were constantly watching our spending.’
In December 2016 they decided the only way to free themselves of the debt was to move to Milton Keynes, where homes are cheaper, and use the equity released from their London property to clear the loan.
Mark says: ‘We’re so disappointed with how we were treated by an organisation we had no idea would get into financial trouble. We were saddled with debt we could only repay by uprooting our family.’
Interest-only deals were once extremely popular, accounting for one in three loans in 2007.
With these deals you paid only the interest on the loan, rather than also paying off the capital. This made monthly repayments much cheaper — £563, on a typical £150,000 loan at 4.5 per cent, rather than £834.
The catch is that at the end of your mortgage term you must repay the sum you originally borrowed.
Borrowers were meant to have a way of clearing the loan, but banks rarely checked these were in place.
In the Nineties, tens of thousands of homeowners took out complicated investments alongside their mortgages, called endowments, which were designed to clear their debt when the mortgage ended.
But many of these performed dismally, leaving borrowers with no means of repaying their loan.
And then came the interest-only crackdown. Lenders started automatically rejecting anyone without a deposit or equity of at least 50 pc, while others turned away anyone who didn’t have a huge salary or a £1 million pension pot.
Many lenders pulled this type of mortgage altogether. In 2007, some 81 firms offered interest-only loans, compared with just 28 today.
The number of borrowers given interest-only deals also plummeted. In 2007, banks handed out 332,000 interest-only mortgages. Last year they approved just 8,300 — less than 1 per cent of all new loans.
Of the 1.9 million people with interest-only mortgages, thousands are expected to have no way of repaying the money when the term ends.
It is predicted around 30,000 borrowers with loans ending within the next two years will owe at least 75 per cent of the value of their homes.
Money Mail has received dozens of letters and emails from worried homeowners who can’t repay interest-only loans. Many say banks have been inflexible and refuse to give them a better rate to help them pay back the debt faster.
THE DEATH OF ‘LIAR LOANS’
Beat the clampdown
- Cancel any unused direct debits for magazine subscriptions or gym memberships. The more disposable income you have the more likely it is you’ll be accepted.
- Do not make any big purchases, such as a new car or an expensive holiday, before you apply. And pay off any credit card debit.
- Check your credit rating for free with Noddle (noddle.co.uk) or ClearScore (clearscore.com). If it is anything less than good, wait to apply until you’ve improved it.
- Just because one lender says no it doesn’t mean they all will. But be careful not to make too many applications in quick succession or you’ll look desperate.
- Use an independent mortgage broker. They will know where the best rates are and which lenders will most likely accept you. Try unbiased. co.uk on 0800 023 6868.
With so much cheap funding sloshing about before the financial crisis, banks weren’t particularly worried about the risk of homeowners defaulting on their loans.
As a result, they became very relaxed about checking if borrowers earned what they said they did.
Self-certification mortgages allowed people to borrow without having to prove their salary.
They soon earned the nickname ‘liar loans’, because borrowers would routinely inflate their earnings to get a bigger loan.
Dozens of brokers, who have since been struck off and fined, were also caught encouraging borrowers to fib about their incomes.
The intent of these loans was well-meaning — they were aimed at the self-employed, who don’t have a pay cheque to prove their earnings.
But nearly half of all self-certification mortgages were given to the employed, who simply wanted to buy more expensive homes.
According the City watchdog, nearly six in ten borrowers who took out these loans fell behind on their payments.
And in 2014, they were banned by the financial regulator. While this has stopped the employed inflating their incomes, it has also left few options for entrepreneurs.
Many banks have introduced tough criteria for self-employed borrowers, often requiring three years’ worth of accounts to prove income.
FIRST-TIME BUYER CRISIS
Before the financial crash, buyers didn’t need a deposit to buy a house. They could take out one of many 100 per cent loans on offer.
However, when house prices then plummeted from 2007 onwards, many buyers ended up in negative equity — meaning they owed more on their mortgage than their house was actually worth.
This wasn’t a problem for those happy to stay in their home and who were able to meet mortgage repayments.
But thousands of growing families remain stuck in homes that are too small, or have been forced to sell properties at a loss.
As a result, the 100 per cent mortgage has since all but disappeared.
There were 46 lenders offering this type of deal in 2007. Today there are just six, and a family member must usually put up their home or savings as security.
Banks are also more reluctant to lend to borrowers with 5 per cent deposits, preferring at least 10 per cent.
In the first three months of 2007, banks lent £4.6 billion to borrowers with a 5 per cent deposit.
During the same period this year they lent just £120.8 million. There are also fewer deals to choose from.
Over the past ten years the number of 5 per cent deposit loans on offer has fallen 72 per cent from 980 to 270.
This is despite a Government Help to Buy scheme launched in 2013 to help borrowers with small deposits.
It means that it is taking first-time buyers today an extra two years to save enough to get on the housing ladder, according to UK Finance, the mortgage lenders’ trade body.
TOUGH RULES FOR OLDER BORROWERS
During the boom years lenders didn’t typically have maximum age limits. Even those which did allow borrowers to repay their loan by the age of 85, meaning you could get a mortgage well into your 60s.
Some banks and building societies even had special retirement mortgages aimed at pensioners.
In 2007, the Mail reported that a 102-year-old man in East Sussex had been given a 25-year mortgage for £200,000. That would last until he was 127, making him the oldest person ever to live.
But in July 2009, Santander — then Abbey National — was the first to cut its maximum age, from 85 to 75. Swathes of lenders followed, introducing age limits as low as 65.
They were worried that otherwise they may be accused of irresponsible lending by the City watchdog, which had begun drafting strict new rules.
But it meant thousands of borrowers in their mid-40s were barred from getting a mortgage despite being capable of meeting the repayments.
Finally, though, things are starting to look better for older borrowers.
Last week, the City watchdog pledged to cut red tape stopping lenders from offering interest-only mortgages to older borrowers.
This would mean borrowers could get mortgages that last until they die or go into care. A number of smaller banks have already announced they would be willing to offer these ‘mortgages for life’.
In the past two years, more than 30 building societies have increased their maximum age limits, while 14 now don’t have an age cap at all.
But many of the big banks still have strict rules on older borrowers.
If you have a loan with Royal Bank of Scotland, for example, you need to repay it by the time you turn 70.
The same applies with Barclays, although the bank says it judges each case individually. HSBC’s maximum age is 68, but it says it can consider loans that last beyond this on a case-by-case basis.
The number of mortgages approved by banks has more than halved from nearly 3.3 million in 2007 to below 1.5 million last year
THE MORTGAGE PRISONER TRAP
As part of the City watchdog’s clampdown on mortgage lending, banks are required to look closely at borrowers’ income and outgoings.
Ten years ago you could borrow as much as seven times your salary.
Today you can borrow up to five times your earnings, and lenders carry out thorough reviews of your payslips and bank statements, as well as how much debt you owe. Banks may ask how much you spend on meals out, going to the gym and how much fuel you use.
This information gives them a better idea of what you can afford to borrow. But it also means up to one million borrowers are now deemed so-called mortgage prisoners.
These are people who already have a mortgage but cannot switch to another deal because they do not meet these new, tougher checks — even if the monthly repayments would work out cheaper.
It means thousands of borrowers are missing out on huge savings from record-low mortgage rates.
Someone with a £150,000 mortgage on the average lender’s standard variable rate of 4.6 per cent, for example, would pay £277 a month more than those who can switch to a top two- year fix at 0.99 per cent with Yorkshire BS — a yearly loss of more than £3,000.
Under the rules, banks are allowed to waive these checks for people who already have mortgages so they are not trapped on expensive deals — but this doesn’t always happen.