Interest-only lenders refuse to detail options for struggling borrowers

Mortgage lenders are in the process of writing to borrowers who only pay the interest on their loans each month – rather than chipping away at the outstanding capital element as well – asking them to review their repayment plans. But lenders are not being clear about what will happen to those who reach the end of their agreed mortgage term without being able to clear the capital sum.

The uncertainty is troubling for many of the hundreds of thousands of borrowers believed to be in this position. The Telegraph has heard from a number of readers who are concerned that their lender will force them to switch to a repayment mortgage – which would be far more costly on a monthly basis – or worse, sell their property.

The Sunday Telegraph asked all the major interest-only lenders what options they will offer customers whose repayment plan will leave them with a shortfall or who simply do not have a repayment vehicle in place.

Santander, Barclays, HSBC, Halifax, NatWest, Nationwide, Virgin Money and Yorkshire Building Society have all refused to disclose their plans, insisting they will take a view on individual cases.

When pushed, none of the lenders would even give a list of possible options they will offer to borrowers during the mortgage term or at maturity.

David Hollingworth of mortgage broker London and Country said it is unlikely lenders will force interest-only borrowers to sell their property. “That would be quite an aggressive approach and I do not think lenders would go that far, but they may try to move people to a repayment mortgage, which would push up monthly costs,” he said.

The City watchdog, the Financial Conduct Authority (FCA), has been looking closely at the issue.

Interest-only loans were especially popular in the years running up to the financial crisis. They allow borrowers to make smaller monthly repayments which cover just the interest being accrued and save to repay the debt at the end of the term – typically 25 years.

While the FCA found there was little evidence that the loans were mis-sold, it has warned the sector is like a “ticking time-bomb”.

The FCA estimated that 2.6 million interest-only mortgages will be due for repayment by 2043. It said 10pc of these borrowers – 260,000 people – do not have a strategy to repay their mortgage and around half of all interest-only borrowers will not have enough money to pay off their loan.

The FCA expects many borrowers will have a shortfall of more than £50,000 at the end of their mortgage.

New research puts the figure higher. Ascent Performance Group, which provides services to lenders, last week said 20pc of interest-only borrowers do not have repayment vehicles in place and do not know how they will pay off the capital.

It said 43pc have a suitable vehicle to repay the loan. A further 37pc have a plan which either requires them to sell their property, rely on their family for financial support, sell a second property or switch to a more expensive repayment mortgage.

The FCA has asked lenders to write to all their interest-only customers to request that they review their repayment strategy. Customers who are concerned that they may have a shortfall are being asked to contact their lender. Most lenders have started this process but they are being cagey about how they will deal with these customers. The FCA said it expects lenders to treat interest-only customers fairly and consider what options they can offer them, either during the mortgage term or at maturity.

Santander, Barclays, HSBC, Halifax and Virgin Money are still selling interest-only mortgages. NatWest, Yorkshire and Nationwide have withdrawn their interest-only mortgages but have existing borrowers on their books.

The types of repayment vehicles these lenders will accept varies significantly.

Santander said it will accept investment vehicles such as an endowment, mortgage-linked Isa or a managed investment plan. It will also accept the sale of the property as a repayment vehicle. The lender will not accept pensions, bonuses, overpayments, cash savings, inheritance or the sale of other properties.

HSBC will accept cash savings and overpayments, along with endowments and investment plans, but will not accept the sale of the property as a repayment vehicle.

NatWest said its standard repayment vehicles include endowments, investment Isas and pensions, but it may consider bonuses or the sale of a business or property if the customer met certain eligibility criteria.

Nationwide refused to disclose its list of acceptable repayment vehicles.

Andrew Montlake of mortgage broker Coreco said lenders should be upfront about how they plan to deal with borrowers who are likely to have a shortfall.

“The more information lenders make available to borrowers the better, as it would allow them to carefully consider the options,” he said.

Despite the lack of information from lenders, Mr Montlake urged interest-only borrowers to come clean if they think their repayment plan will not be sufficient to repay their loan.

He said: “The worst thing borrowers can do is bury their head in the sand. They can extend the term of their interest-only mortgage, or switch to a repayment mortgage and extend the term, which may be affordable for some thanks to the current low interest rates. Another option is to overpay the mortgage. Even £100 extra a month can make a big difference.

“Fortunately for many people there is time to fix the problem, but they have to use the time wisely.”