The FSA has identified that interest-only mortgages represent a ticking timebomb and are asking lenders to clarify their liability on these loans.
The theory of interest-only loans was that borrowers would make independent arrangements to enable them to repay the capital at the end of the term. For many years, such loans where linked to endowment insurance policies, with the lender holding a charge over the policy and receiving regular notifications that premiums were being paid. Over time, this connection was broken and borrowers had to maintain proper arrangements themselves. It has been obvious for some time that many have failed to do this and as a result will be unable to repay the capital sum on the due date.
Trying to allocate blame for this situation is pointless. It could be said that lenders should not have stopped tracking repayments but, from their point of view, their lending was supported by the value of the property charged against the loan. Equally, borrowers should have been more prudent but rational behaviour was diminished by the astronomic rise in property values, which resulted in a false sense of wealth, a problem compounded by economic policies encouraging consumer spending.
To put some numbers on the problem, it is estimated that 150,000 interest-only mortgages will reach the end of their term every year for the next 10 years, and that 80 per cent of those borrowers have no repayment strategy for the outstanding loan. The total sum involved is thought to be in the region of £120bn. It is clear there is no ready solution, such sums being way beyond the capacity of equity-release lending. Only a relaxation of lending criteria could enable such a need to be met. But, in turn, any such borrowing would be at much higher rates and would significantly restrict the ability of lenders to make funds available to younger housebuyers.
It is unfortunate that some politicians continue to believe they can micro-manage the mortgage market and control the behaviour of consumers. Obviously, society has an interest in ensuring an adequate supply of housing but manipulating interest rates, encouraging house price inflation, which in turn forced many borrowers to take on ruinous amounts of debt in order to get into the housing market, must be recognised as a seriously flawed policy.
The problems the FSA is now identifying are not new. There are many people entering retirement carrying significant debt with inadequate income to service it.
Is it possible, or right, to devise a management strategy for these individuals? Or should society stand back and leave it for them to sort it out for themselves, perhaps by accepting a move to cheaper housing and significantly reduced standards of living?
The sheer numbers of people who are seeking advice with their financial difficulties sends a clear message that advisers have a role to play, regulators need to fully understand the problem and product providers have a requirement to devise mechanisms which will ease the immediate problems and ensure that future borrowers cannot borrow beyond their means.
Richard Fox is chief executive of the Society of Mortgage Professionals