The Full English Accompaniment – Are interest-only mortgages the next PPI?

What’s piqued my interest this week?

This week the BoE raised the base rate to it’s highest level in nine years, 0.75% (1). All the newspaper business sections went into meltdown and a slew of commentators popped up to foretell doom. My opinion of the whole thing largely follows Monevator’s, this is still historically very very low (2). Rather than repeat Monevator, this week I’ll focus on something else that caught my eye.

A couple of weeks back I posted a link to a BBC article about a couple who didn’t understand their interest-only mortgage, had some bad life circumstances, and subsequently were trying to complain to the regulator about their bank so they didn’t have to leave the home they hadn’t made repayments on (3). This prompted YFG into a rant on people who want something for nothing, definitely worth a read (4). Some scraping script must have clocked me viewing these stories, as I was directed to a company which claimed ‘you could be owed thousands if your interest-only mortgage was mis-sold’ (5). From their website (5):

• 1.9 Million people have been led into an interest only mortgage

• Lenders and brokers may have mis-sold mortgages to thousands of customers

• Many of the people affected by this have no idea they could be due compensation

• Nearly 2 Million have been left repaying a mortgage that was inappropriate and unaffordable

• Interest only mortgages holders are being refunded thousands of pounds

Well dear readers, bricks were shat. I had to go and wash my head in a bucket with a bit of casual screaming thrown in to calm down. If you are making the biggest purchase of your life, how do you sign onto something that you know is ‘unaffordable’? Are people seriously not reading the small print? I completely get the something for nothing types who signed up to IO-mortgages expecting their house value to go up, and the added equity to provide them with something for the next re-mortgage. I understand it but don’t agree with it. But how do you sign up to an IO-mortgage when you can’t afford to also put something by in another investment vehicle, or where you don’t expect to move at the end.

Hey look, here’s another couple who are losing “their home” because they can’t remortgage what was an IO-mortgage (6). Concerns from the FCA that people have not put money away or planned for the end of their IO-mortgage have been a recurring theme in the press (6, 7). Depending on your source somewhere between 1.6 and 1.9 million people currently have IO-mortgages, and the FCA expects 600,000 to expire in 2020 (7, 8). As some people clock onto the fact they may suddenly lose their home, the claim sharks have started to circle.

Just a few months ago, the concerns around IO-mortgages seemed to have led to a decrease in their number. Or perhaps their utility was lost as house prices slowed. Either way, the number of IO-mortgages was falling, with one source reporting they had halved (6, 8). This appears to have now reversed. Thirty-three lenders now offer IO-mortgage products, a modest increase of eight in the last couple of years, but nowhere near the 73 of 2008 (9). It is likely these products are only available in specialist circumstances (10)

The argument from the claims people is that in some cases the mortgage products were mis-sold; bad advice was given by brokers/ lenders suggesting that IO-mortgages would be the most affordable (11, 12). Which? even offers a template letter for complaints rather than going through a claims company (12). The Financial Ombudsmen, much more helpfully, actually gives case studies of when and where mis-selling occured, and when it’s your own damn fault (13). The Financial Ombudsmen Service has broadly upheld one-in-five complaints, around 300-400/year (11). The fear is that as more IO-mortgages mature, customers who are not prepared will turn to claims of mis-selling for compensation (11). Two reasons why this infuriates me:

  1. If you’re the sort of person who doesn’t read the T&Cs on the biggest purchase of your life, doesn’t understand the product, and doesn’t make any effort to save or prepare for an end point, why is it someone else’s fault?
  2. The average shortfall on IO-mortgages is estimated to be >£70k (6). A few thousand compensation is not going to bail you out of the sordid hole of your own making.

And with that, I’m off for a lie-down.

Have a great weekend,

The Shrink

Side Orders

Other News:

Opinion/ blogs:

What I’m reading:

An exam textbook (le sigh)

Religio Medici by Sir Thomas Browne – the theological and psychological reflections of a C17th doctor

Enchiridion by Epictetus – Bedside reading for a bad day

References:

  1. https://www.moneysavingexpert.com/news/banking/2018/08/bank-of-england-base-rate-decision
  2. http://monevator.com/r-star-trend-interest-rate/
  3. https://www.bbc.co.uk/news/business-44851363
  4. https://youngfiguy.com/palms-up-or-palms-down-person
  5. https://www.mortgage-claim.co.uk/landingpage/twitter/variant2/
  6. https://www.theguardian.com/money/2018/may/02/elderly-couple-face-losing-home-as-interest-only-loan-crisis-bites
  7. https://www.theguardian.com/money/2018/mar/19/interest-only-mortgages-payment-shortfall-remortgage-lenders
  8. https://www.ukfinance.org.uk/number-of-interest-only-mortgages-halves-in-six-years/
  9. https://www.mortgagestrategy.co.uk/rise-in-number-of-lenders-offering-interest-only-mortgage-options/
  10. https://www.telegraph.co.uk/personal-banking/mortgages/time-comeback-mortgage-lenders-return-interest-only/
  11. http://www.mortgagesolutions.co.uk/news/2018/04/03/interest-mortgages-next-mis-selling-scandal-legal-tech-firm-claims-analysis/
  12. https://www.which.co.uk/consumer-rights/advice/i-think-ive-been-mis-sold-my-mortgage-what-can-i-do
  13. http://www.financial-ombudsman.org.uk/publications/technical_notes/interest-only-mortgage-case-studies.html
  14. http://www.thisismoney.co.uk/money/markets/article-6010545/Travis-Perkins-warns-year-profits-DIY-chain-Wickes-falters-amid-tough-trading-conditions.html
  15. http://www.bbc.co.uk/news/business-45050213
  16. https://www.thetimes.co.uk/article/why-it-pays-to-be-king-of-the-castle-in-scotland-gv66nl7wm
  17. https://www.moneywise.co.uk/news/2018-08-01/exit-amateur-landlords-could-boost-private-pension-pots-28bn
  18. https://www.moneywise.co.uk/news/2018-07-31/men-splashing-the-cash-engagement-rings
  19. http://monevator.com/how-to-open-an-online-broker-account/
  20. https://youngfiguy.com/last-chance-u-and-financial-independence
  21. http://quietlysaving.co.uk/2018/08/01/july-2018-plus-other-updates/
  22. http://www.msziyou.com/net-worth-updates-july/
  23. http://www.msziyou.com/intergenerational-unfairness-part-1/
  24. http://thefireeng.com/fudging-numbers/
  25. https://quittingteachingblog.wordpress.com/
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3 thoughts on “The Full English Accompaniment – Are interest-only mortgages the next PPI?

  1. I can’t believe that interest only mortgages can be mis-sold in the same way PPI has been – the name itself is shouting out exactly what the product is and what you are paying for (or not)! No sympathy from me. As you say, houses are likely to be the biggest purchases people will make in their lives, why go in when you haven’t done your research or understand what you’re getting into?

    Liked by 1 person

    1. Absolutely Weenie, the name couldn’t be clearer.

      Can I-O mortgages be missold? Theoretically yes. But I don’t see how the examples we see in the media are. An IFA can’t physically force you to save if you don’t want to. Besides, they’ve probably been brought in for the mortgage and all financial planning and advice is ignored after the contract is signed. It also doesn’t seem to be a question on affordability either and if you make certain lifestyle decisions that impact your ability to repay, that will affect both I-O and regular mortgages. You’re warned pretty clearly that if you don’t keep up payments your house may be repossessed. That obviously (!?) includes the lump sum payment at the end for I-O mortgages.

      Liked by 1 person

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