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Homeowner’s rights at the end of their mortgage term
Posted on 14/03/22 in Housing Matters
Housing Matters talks to Charles Roe, Director of Mortgages at UK Finance, Debt Camel website author Sara Williams, and Syed Rahman from Shelter’s Specialist Debt Advice Service about the problems borrowers can face at the end of their mortgage term, and the options available.
End of the mortgage term
Almost half a million interest-only mortgages are due to end before 2027. Some interest-only borrowers have a way of paying off the balance when they reach the end of their term, but many more do not.
The mortgage term is the entire length of time the mortgage is set to be paid over (often 25 or 30 years), not the duration of a particular product such as a fixed rate, which can be much shorter.
Once a mortgage term has ended, any outstanding balance is due immediately. This can leave the homeowner with limited options: sell, remortgage, or face possession action in the courts.
Most mortgages are repayment mortgages. A repayment mortgage allows the borrower to pay off some of the capital each month, along with a portion of the interest. It offers the borrower security that if they keep the payments up to date, the mortgage will be paid off in full when the term ends. Because the payments cover both capital and interest, the monthly instalment is more expensive than if the borrower only paid the interest.
Shortfalls on repayment mortgages
Borrowers in financial difficulty sometimes switch to an interest-only mortgage for a brief period or convert their mortgage permanently. Unless they plan ahead to pay the shortfall, they still owe their lender money when the mortgage ends.
During the COVID-19 pandemic, almost 2 million borrowers took advantage of mortgage payment deferrals to ease the pressure on their finances. Borrowers who do not catch up with their payments, or add the deferred payments to their mortgage balance, could reach the end of their term with a balance to pay.
Interest-only mortgages and repayment vehicles
An interest-only mortgage payment does not reduce the capital balance. People who borrow £100k to buy their home still owe £100k when the term ends. When interest-only mortgages first emerged on the market, most lenders insisted that the borrower had to have a way of paying off the balance at the end of the term. Financial investment products were sold to borrowers to ensure they had a way of paying off the balance when their term ended.
This resulted in the infamous mass mis-selling of endowment policies as a repayment vehicle. Many financial advisers promised their clients that a mature endowment would pay off the mortgage balance in full, with enough left over for a luxury holiday or new car. In reality, they rarely performed as well as the borrower had been led to believe. Complaint investigators discovered that borrowers had been routinely misadvised about the risks of endowments. Brokers and financial advisers had not explained that endowments are linked to the market performance of investment products, which can fall as well as rise - and fall they did. By 2008, the value of mature endowment policies had fallen by as much as 68% compared to 10 years previous.
Long term impact
Although borrowers relying on endowment products were compensated for the poor advice they received, it was rarely enough to pay off the mortgage. Borrowers were compensated as though they had paid exactly the same amount of money into a repayment mortgage, but repayment mortgages cost more. That means many borrowers who were compensated for mis-selling are still facing an outstanding balance at the end of their mortgage term.
Options for homeowners
UK Finance represents 300 firms in banking and finance, including the vast majority of residential mortgage lenders. They emphasise the need for borrowers to get in touch with their lender early, and suggest most lenders will avoid court action if a solution is proposed.
"Lenders stand ready to help customers who may be struggling with their payments. It is important that anyone experiencing financial difficulty gets in touch with their lender as soon as possible to discuss the best options for them. Support is available, and possession is only ever a last resort."
Charles Roe, Director of Mortgages at UK Finance
Claim compensation for endowment shortfalls
Borrowers who were mis-sold an endowment policy and have not yet been compensated should contact their provider straight away to make a complaint. The Financial Ombudsman Service can deal with complaints that are made within three years of the borrower receiving a ‘red letter’ warning that the endowment might not perform as well as expected. Different time limits apply for policies taken out before February 2003. Check the information on the Ombudsman website to confirm if a complaint could be made in time.
Sell the home, or another asset
The continued rise in house prices means borrowers who have paid an interest-only mortgage for 20 years or more are likely to have a large amount of equity, if they have not secured other loans on the property in the meantime. They could consider selling the home and downsizing. This is the most straightforward way of dealing with an end-of-term balance.
Other assets, such as a pension fund could cover the outstanding balance. The lender might be willing to wait until another asset can be sold or realised. Borrowers should talk to their lender about plans to sell their home or use another asset, especially if the money will not be available straight away when the mortgage ends.
Change the mortgage
The borrower could ask their lender to extend the term of the mortgage. They will usually have to show they can continue making at least the interest payments. This will only delay the repayment of the capital balance, so the borrower should think about how they can improve their situation when the balance falls due again.
Some lenders now offer a ‘lifetime’ mortgage, which allows borrowers to remain in their homes until they die or move into permanent care. A financial planner can advise which lenders offer lifetime mortgages or other equity release options. They are normally only available to over-55s. UK Finance state that the average age of a borrower reaching the end of an interest-only mortgage is 66, so this could be an option for many homeowners in this situation.
Some interest-only mortgages allow the borrower to overpay a certain percentage without a penalty. Check the terms of the contract, to see if it would allow the borrower to clear some of the capital. Borrowers with a reliable income could switch to a repayment mortgage if they can afford the increased payments.
Get regulated financial planning advice
For professionals in advice agencies and local authorities, advising borrowers about financial products as a solution to a debt or housing problem is tricky. Advisers can outline options, but recommending a financial product or a change to the mortgage is financial advice, regulated by the Financial Conduct Authority. It is not covered as part of a debt advice licence. Unbiased can help people who need advice about products to find a financial adviser or broker.
It is often worth borrowers paying up front for financial advice where possible. Commission fees can be expensive, especially if they are added to the mortgage and interest is charged. It’s not always clear how much the financial adviser is being paid, or by who, or when. Prospective borrowers should ask their adviser or broker about their commission, and how much it will cost them including any interest.
Speak to the lender, but don't assume they will offer a new mortgage
Sara Williams regularly hears from people in financial difficulty through her Debt Camel website.
"Borrowers often just want to continue making their current payments, which they can afford. But the lender of an interest-only mortgage wants it repaid - legally they don't have to offer a new mortgage at all and it is extremely unlikely that they will offer a new mortgage on similar, interest-only, terms. Even though this may feel unreasonable to the borrower, it is very unlikely that the Financial Ombudsman (FOS) would see it as unfair treatment and uphold a complaint about it.
Some borrowers could have other reasons to complain. Some interest-only and "bad credit" lenders increased their interest rates unreasonably when other interest rates were dropping. And some lenders have charged unreasonably high fees for sending standard letters about mortgage arrears. These are worth pursuing but do not solve the fundamental problem about the interest-only mortgage coming to an end.
One group who may be able to remortgage is the over 55s where there is a lot of equity in the house, where equity release or a lifetime mortgage may be possible, but specialist financial advice is needed for this."
Sara Williams, author of the Debt Camel website
When the lender takes possession action
Mortgage lenders can issue a County Court claim for possession if the borrower breaches the contract, for example by not making the payments as agreed. This includes after the mortgage term has ended, if the borrower does not pay the balance they owe.
Most borrowers can avoid repossession if they can afford to make regular payments, thanks to the court’s powers to suspend possession orders. But those powers rely on the borrower being able to repay the arrears over the remaining term of the loan. If the term has ended, the power does not exist.
The court can give the borrower time to sell the property or refinance the mortgage if the borrower already has evidence it will happen. Shelter's Specialist Debt Advice Service provides a consultancy service to debt advisers. They often see cases where the borrower has left it too late.
"The court can give the borrower time to sell the property or remortgage, but judges usually want to see that the borrower has evidence that this will definitely happen. It's not enough to turn up at court and ask for more time before the property has been put on the market.
We sometimes see cases where borrowers have left it too late to ask the court to adjourn the case and allow them to sell. If they'd put the property on the market sooner, or spoken to their lender to agree more time, they could have avoided expensive court action.
Mortgage lenders do not have to wait to get the best price for the property. They often sell at auction for less than the homeowner would have accepted. Borrowers can end up with a fraction of the sum they expected to get from a sale of the property.
If the borrower's only real option is to sell they should contact the lender early, ask if they have an assisted sale scheme, and make an effort to market and sell the property quickly."
Syed Rahman, Specialist Debt Adviser, Shelter
Housing Matters would like to thank the contributors to this article. Charles Roe is Director of Mortgages at UK Finance, Sara Williams is the author of the popular Debt Camel website and Institute of Money Advisers trustee, and Syed Rahman is an adviser on Shelter's Specialist Debt Advice Service.
Further reading and resources
The Shelter Legal page Owner sells the home before eviction sets out the rules the court will apply if the borrower requests more time to sell.
For the public
NHAS guides to download in the Mortgages and debt section:
- Are you worried about your mortgage? is a general guide for borrowers.
- Voluntary sale of mortgaged property explains the assisted sale scheme that many lenders offer.
The Debt Camel website contains lots of useful information for borrowers about their options to deal with mortgage problems.
UK Finance has published an Interest Only Toolkit to download as a PDF.