According to my research, of the 4,690 properties in Oakham,
1,672 of those properties have mortgages on them. 87.0% of those mortgaged
properties are made up of owner-occupiers and the rest are buy-to-let landlords
(with a mortgage).
However, the concerning part is that 361 of those Oakham
mortgages are ‘interest only’.
My
research also shows that each year between 2017 and 2022, 4 of those households
with interest only mortgages will mature, and of those, 1 household a year will
either have a shortfall or no way of paying the mortgage off. Now that might not sound a lot, but it is
still someone’s home that is potentially at risk.
Theoretically this is an enormous problem for anyone in this
situation as their home is at risk of repossession if they don’t have some
means to repay these mortgages at the end of the term (the typical term being 25 to 35 years). Banks and Building Societies are under no
obligation to lengthen the term of the mortgage and, when deciding whether they
are prepared to do so or not, will look at it in the same way as someone coming
to them for a new mortgage.
Back in the 1970’s and 1980’s, when endowment mortgages were
all the rage, having an endowment meant you were taking out an interest only
mortgage and then paying into an endowment policy which would pay the mortgage
off (plus hopefully leave some profit) at the end of the 25/35-year term. There were advantages to that type of mortgage
as the monthly repayments were lower than with a traditional capital repayment
and interest mortgage. Only the
interest, rather than any capital, is paid to the mortgage company - but the
full debt must be cleared at the end of the 25/35-year term.
Historically plenty of Rutland homeowners bought an
endowment policy to run alongside their interest only mortgage. However, because the endowment policy was a
stock market linked investment plan and the stock market poorly performed
between 1999 and 2003 (when the FTSE dropped 49.72%), the endowments of many of
these homeowners didn’t cover the shortfall. Indeed, it left them significantly in debt!
Nonetheless, in the mid 2000’s, when the word endowment had
become a dirty word, the banks still sold ‘interest only’ mortgages, but this
time with no savings plan, endowment or investment product to pay the mortgage
off at the end of the term. It was a
case of ‘we’ll sort that nearer the time’ as property prices were on the
rampage in an upwards direction!
Thankfully, the proportion of interest only mortgages sold
started to decline after the Credit Crunch, as you can see looking at the graph
below, from a peak of 43.81% of all mortgages to the current 8.71%.
Increasing the length of the mortgage to obtain more time to
raise the money has gradually become more difficult since the introduction of
stricter lending criteria in 2014, with many mature borrowers considered too
old for a mortgage extension.
Oakham residents who took out interest only mortgages years
ago and don’t have a strategy to pay back the mortgage face a ticking time
bomb. It would either be a choice of hastily
scraping the money together to pay off their mortgage, selling their property
or, more disturbingly, the possibility of repossession.
I want to stress to all existing and future homeowners who
use mortgages to go in to them with your eyes open. You must understand, whilst the banks and
building societies could do more to help, you too have personal responsibility in
understanding what you are signing yourself up to. It’s not just the monthly repayments, but the
whole picture in the short and long term.
Some of you reading my blog ask why I
say these things? I want to share my
thoughts and opinions on the real issues affecting the local property market,
warts and all. If you want fluffy clouds
and rose tinted glasses articles – then my articles are not for you.
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