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WALTER HARPER has lived in his beloved home for two decades — but last July he was forced to put it on the market. He shared the Luton bungalow with his wife and, after she passed away, his partner, and has watched his grandchildren play there.
But he is being forced to move because he owes £110,000 on an interest-only mortgage that he can’t afford to repay. Instead of spending his last days in the house he loves, he will be forced to rent elsewhere.
Mr Harper, 69, first put his house on the market for £230,000. He has dropped the asking price by £20,000 and even if he gets this, he will still lose half of the money paying off the bank.
These are savings he desperately needs, as rent is going to cost him almost £9,000 a year.
Like so many others caught in the interest-only trap, Mr Harper is being forced to leave his family home because of an investment that performed far worse than predicted.
‘I had hoped to own my home by now. This wasn’t what I planned for my retirement at all,’ he says.
When Mr Harper took out his mortgage, he was also saving into a with-profits pension. In 1997 he was told this would eventually be worth £276,000, allowing him to take £69,000 as a cash lump sum to pay off most of what he owed.
But when he retired in 2008, his pension was worth half this amount, leaving him £78,500 short.
He plans to rent near his daughters, Lesley and Tracy, and their children. He’ll use what is left from the house sale to supplement his pension income.
Mr Harper’s tale is far from unusual. There are almost four million homebuyers in Britain with interest-only mortgages.
With these mortgages, borrowers pay only the interest on the loan, but don’t have to pay back any of the capital on the property. This happens when the loan matures, usually at the end of 25 years.
Interest- only deals became popular in the Seventies when people were attracted to them because they looked cheap in comparison to loans where you repaid the capital as well.
Homebuyers planned to pay off their capital by using money from an endowment — a type of savings plan linked to the stockmarket.
In the Eighties and Nineties, interest-only loans boomed, driven by commission- hungry bank salesmen who promised huge profits on the endowments.
People were sold a dream that taking one out would not only pay for the mortgage, but also provide them with a handsome lump sum, which they could spend on the holiday of a lifetime and a car.
NOW thousands, like Mr Harper, who believed this sales pitch have been caught out. In the housing boom of the late Nineties, a different problem emerged. Homebuyers took interestonly deals as they were the only way of stretching wages to buy a house.
Many of these desperate homebuyers now find themselves trapped.
This is what has snared National Trust recruiter Dee Wadham. She took an interest- only mortgage in 2004, just as the property bubble was about to peak.
She bought a one-bedroom cottage in the Cornish village of Par for £120,000 with her partner. After they separated, she bought him out and took an interest- only loan so she could afford the mortgage on her £17,000 a year salary.
As house prices rose, she took on a bigger mortgage in order to renovate the house.
Her monthly repayments on the £68,000 loan are £185, but this wipes out a huge chunk of her take-home pay. Dee is not sure how she will repay the £68,000 she will owe when the mortgage term ends in 2021.
Her hope is she will be able to extend the mortgage term, but she will be 64 when it matures and banks are reluctant to lend to older customers these days. Anoth capita
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her option is to pay off chunks of al as and when she can. no point did anybody say to me: re is no way you can afford to pay that amount of money.” I am ened and worried about the e,’ says Ms Wadham. city watchthe Financial Services Authority, has warned of an interest-only timebomb for 1.3 million people whose mortgages mature within the next eight years.
But industry trade body the council of Mortgage lenders is playing down the concerns. It says most of those caught in the interest-only trap have benefited from years of house price growth and so can use this equity as a way of paying off their loan.
They also believe many will have savings to pay it off.
It’s true that many borrowers have large chunks of equity. Despite recent falls in some parts of the country, since 1987 average property prices are up 279 pc. This should give the average homeowner at least 75 pc equity.
But even the banks have wised up to the risks of homeowners banking on property price increases to pay off their loans. New rules make it difficult for customers to use this as a way of trading up the ladder.
This threatens to affect millions of younger homeowners who bought before these restrictions came in to place.
CHLOE HALSTEAD, 26, took an interest- only deal in 2009 when she bought a three-bedroom semi in Ewloe, North Wales. A repossessed property, it cost a knock-down £80,000 — and while house prices in the region have been falling since then, hers is now worth £110,000.
She chose an interest- only loan, like many first-time buyers, because it dramatically reduced her monthly payments.she plans to sell soon to buy a bigger house. Though experts say Ms Halstead may find herself trapped by the new mortgage rules, she is confident about the future.
‘ I’m not worried about paying the capital because I know I’ll be able to sell at a profit,’ she says. ‘Interestonly is very handy for people looking to invest in property and I hope the banks don’t take away these loans completely.’
Her optimism is typical of many youngsters who sign up for interest-only loans. Mortgage brokers still believe these are an excellent way for those on low incomes to take their first steps on the property ladder — as long as they start to make capital repayments, or savings, after a few years.
The problem is many don’t. And years later they are forced to turn to friends and family, or the banks for help.
Many rely on an inheritance to pay off their mortgage. In 1990, Allan Keith Dixon, 58, and his wife Maureen, 62, took out a £100,000 interest-only loan for their bungalow in Tyne & Wear. They also took out an endowment policy, but this failed dismally.
Their house is now worth £325,000, but they don’t want to sell. Instead they will extend their mortgage term until they receive a windfall from a relative.
‘We will just keep paying our mortgage until we receive our inheritance,’ says Mr Dixon, a retired teacher who became a mortgage adviser.