‘Til death do debts part

A couple with a business person.
A couple with a business person.

How would you fancy continuing to make mortgage payments for the rest of your life?

Well, this is one possibility that’s being considered by a major lender as a potential lifeline that could be thrown to home owners who will never be able to repay the outstanding debt owed on their interest-only mortgage when the term comes to an end.

Santander has confirmed that it is considering offering those who are on an interest-only deal and will be unable to fully pay it off when it ends, the opportunity to switch to a repayment mortgage, which could potentially last into their later years or even until they die.

While the possibility of making mortgage payments in your twilight years may not sound palatable to some, others may find it more appetising than the realistic alternatives.

The idea could be an extra option for those who might otherwise have to downsize to a home elsewhere, which in itself can be a costly process.

Some people could also be saved from the trauma of having their home repossessed.

However, experts have cautioned that anyone considering such an option should seriously consider discussing their plans in detail with family members as they could end up forfeiting some of their inheritance.

Santander’s plans are still in development stage. But if it decides to offer such a mortgage, this could potentially mean that any outstanding amounts left on the home loan would be recouped by the lender upon the sale of the home.

The sale could happen within the customer’s lifetime or after their death and the remaining proceeds would be for the customer, or their estate, to keep.

Someone taking up this potential mortgage option would see the size of their loan reduce as they would be paying off chunks of it and interest would not be added to the outstanding debt.

TICKING TIME BOMB

So why is Santander considering such an option?

Alerts are being sounded across the industry about groups of home owners who are currently sitting on interest-only mortgages.

Fears have been raised that a significant proportion of those who took out an interest-only deal some years ago, do not have a sufficient plan in place for how they will pay off their loan when the deal comes to an end.

This problem is seen as so serious that it has been referred to by regulators as a potential “time bomb”.

Interest-only deals allow borrowers to pay off the capital only when the mortgage term ends, enabling them to maximise their borrowing capacity.

But in 2013, the Financial Conduct Authority (FCA) warned people were failing to put aside enough money on up to 1.3 million of the interest-only mortgages that are due for repayment over the next 30 years. Estimates suggested around half these shortfalls will be more than £50,000.

Nowadays, interest-only deals are generally harder to come by as they tend to be seen as a “niche” product.

Stricter mortgage lending rules came into force in April this year, which mean that people looking to take out a new mortgage face tougher checks to make sure that they can truly afford their loan and that they aren’t just pinning their hopes on house prices rising.

ENCOURAGING START

Are other lenders likely to come up with similar plans?

Well, the industry is paying much thought to the problem, so watch this space.

Ultimately, it’s down to home owners to take responsibility for their debt.

Lenders have been alerting home owners through letters, phone calls and home visits to warn them of the problems they could be facing if they don’t take stronger action.

The Council of Mortgage Lenders (CML) recently reported that lenders had met a commitment to contact a first wave of interest-only borrowers whose deals will come to an end by 2020.

The first wave of mortgage holders will typically include people approaching retirement with large amounts of accumulated wealth.

A second wave of interest-only mortgages will reach maturity around 2027/28, as a result of deals sold during the last house price boom. Borrowers in this wave are expected to be middle aged and less well off.

A third and final wave of interest-only deals will mature around 2032, and it is likely to include concentrations of people who are more heavily-indebted.

The CML has described home owners’ responses so far as an “encouraging start”.

HOW... MUCH DOES IT COST TO RAISE A CHILD TO THE AGE OF 11?

The answer is around £83,600 typically, according to research carried out by Halifax.

Within this figure, childcare was found to the single most expensive element of raising a child in their early years, accounting for almost half of the overall cost at £41,139 on average.

Some 1,000 parents were asked how much they spend on essentials for their children such as food, clothing, schooling and toys.

The results indicate that parents are spending an average of £633.54 a month per child up until the age of 11.

The first year of a child’s life was found to be the most expensive for parents, with parents spending more than £8,500 in the first year alone on average.