2 MILLION FACE LOSING HOMES

They’re victims of the pre-crash mania for interest only mortgages. Today, banks make it far harder to get loans — but that’s brought new problems for homebuyers

ALMOST two million borrowers with interestonly mortgages face having to sell their family home if they can’t repay the cash over the next 15 years, a major probe by Money Mail has found.

It is the legacy of years of irresponsible lending by banks and homeowners burdening themselves with debt they can’t repay.

Ten years after the collapse of Northern Rock, the former bank which pioneered this type of high-risk borrowing, hundreds of thousands are still suffering after being lured in by aggressive salesmen and brokers who were paid huge commissions.

Northern Rock’s call for help from the Bank of england was a landmark for the mortgage industry. It led to the first run on a bank in a century, and thousands of desperate customers lined the streets outside branches to try to rescue their cash.

And while the full extent of the crisis was not known for another year, the lasting effects are still being felt by homeowners a decade on.

Our research lays bare how rules put in place after the collapse have made it almost impossible for many people to secure a mortgage today.

While the strict new rules have good intent, responsible borrowers, who have never missed a repayment in their lives, have now also been locked out of the market.

The number of mortgages approved by banks has more than halved from nearly 3.3 million in 2007 to below 1.5 million last year.

Older borrowers are being told to repay their debts by the time they are 65, even though their guaranteed pension income more than covers any repayments.

The self-employed — particularly those who have recently gone it alone — are stranded as specialist deals for them have been pulled.

Many homeowners have become ‘mortgage prisoners’ and are stuck on costly interest rates because their lender won’t let them switch.

And first-time buyers are having to find enormous deposits to stand a chance of getting a mortgage.

HOW THE BANKS SHUT UP SHOP

A decAde after the collapse of Northern Rock, it’s easy to forget just how easy it was back then to get a loan. You didn’t even need to prove how much you earned.

If you didn’t have a deposit, were approaching retirement or even had a bad credit rating, then there was still a deal for you.

The crash began quietly in July 2007 when a French bank closed two investment funds over fears of a growing debt crisis in the U.S.

Soon after, investment markets froze. This hit Northern Rock, which relied on them to fund its booming mortgage business. It called for cash from the Bank of england and on September 13 was bailed out.

Northern Rock’s business model had allowed it to develop a particularly risky type of loan — the Together Mortgage. It would lend 125 pc loans (i.e. 25 pc more than the person was actually paying for their home) and homebuyers could borrow up to six times their salary.

Similar deals followed with Alliance & Leicester, Bradford & Bingley and the mortgage arm of Halifax, all offering loans over 100 pc.

All this came to an end after the collapse and the Together Mortgage symbolised the worst of the excess. In a major shake-up of the British mortgage market, the city watchdog forced lenders to conduct more detailed checks on borrowers.

This included checking what borrowers spent on childcare, food and eating out, but also how much they spent on luxury items such as steak, wine, and even bikini waxes.

Banks also started to ditch loans that were deemed risky by the regulator — including 100 pc loans, mortgages for older borrowers and ‘self-certification loans’, where you didn’t have to prove your income.

INTEREST-ONLY CRACKDOWN

INTeReST-ONLY deals were once extremely popular, accounting for one in three loans in 2007.

With these deals you paid only the interest on the loan, rather than also paying off the capital. This made monthly repayments much cheaper — £563, on a typical £150,000 loan at 4.5 pc, rather than £834.

The catch is that at the end of your mortgage term you must repay the sum you originally borrowed.

Borrowers were meant to have a way of clearing the loan, but banks rarely checked these were in place.

In the Nineties, tens of thousands of homeowners took out complicated investments alongside their mortgages, called endowments, which were designed to clear their debt when the mortgage ended.

But many of these performed dismally, leaving borrowers with no means of repaying their loan.

And then came the interest-only crackdown. Lenders started automatically rejecting anyone without a deposit or equity of at least 50 pc, while others turned away anyone who didn’t have a huge salary or a £1 million pension pot.

Many lenders pulled this type of mortgage altogether. In 2007, some 81 firms offered interest-only loans, compared with just 28 today.

The number of borrowers given interest-only deals also plummeted. In 2007, banks handed out 332,000 interest-only mortgages. Last year they approved just 8,300 — less than 1 pc of all new loans.

Of the 1.9 million people with interest-only mortgages, thousands are expected to have no way of repaying the money when the term ends.

It is predicted around 30,000 borrowers with loans ending within the next two years will owe at least 75 pc of the value of their homes.

Money Mail has received dozens of letters and emails from worried homeowners who can’t repay interest-only loans. Many say banks have been inflexible and refuse to give them a better rate to help them pay back the debt faster.

THE DEATH OF ‘LIAR LOANS’

WITH so much cheap funding sloshing about before the financial crisis, banks weren’t particularly worried about the risk of homeowners defaulting on their loans.

As a result, they became very relaxed about checking if borrowers earned what they said they did.

Self- certification mortgages allowed people to borrow without having to prove their salary.

They soon earned the nickname ‘ liar loans’, because borrowers would routinely inflate their earnings to get a bigger loan.

dozens of brokers, who have since been struck off and fined, were also caught encouraging borrowers to fib about their incomes.

The intent of these loans was well-meaning — they were aimed at the self-employed, who don’t have a pay cheque to prove their earnings.

But nearly half of all selfcertification mortgages were given to the employed, who simply wanted to buy more expensive homes.

According the city watchdog, nearly six in ten borrowers who took out these loans fell behind on their payments.

And in 2014, they were banned by the financial regulator. While this has stopped the employed inflating their incomes, it has also left few options for entrepreneurs.

Many banks have introduced tough criteria for self-employed borrowers, often requiring three years’ worth of accounts to prove income.

FIRST-TIME BUYER CRISIS

BeFORe the financial crash, buyers didn’t need a deposit to buy a house. They could take out one of many 100 pc loans on offer.

However, when house prices then plummeted from 2007 onwards, many buyers ended up