How a che Eap deal became a financial disaster

WHY DID PEOPLE TAKE OUT INTEREST-ONLY DEALS?

FROM the Seventies until the turn of the century, interest-only mortgages were the most popular type of loan.

Most people were attracted to them because they looked cheap by comparison to capital repayment deals.

At a rate of 4pc, interest-only payments are £500 a month on a typical £150,000 loan, compared with £792 a month for someone on a capital repayment mortgage.

The difference is that interest- only borrowers need to pay off the capital part of their loan when their mortgage term ends — typically after 25 years.

Largely, homebuyers planned to pay off their capital by using money from an endowment — a type of savings plan linked to the stockmarket. In 1988 alone, more than one million homebuyers took interest-only l In 1992 three out of every four mortg taken by homebuyers were interest

Though the popularity of endowm began to decline after the year 2000 a trend began to emerge — a rise in number of homebuyers taking inte only loans who had no idea how the ca would be repaid.

As house price increases raced ahe average wage rises, first-time buyers interest-only deals as a way of gett foot on the property ladder.

Many had small deposits, but inte only deals allowed them to cut t repayments and borrow more. In s

oans. gages only. ments a new n the erestapital ad of s saw ing a eresttheir some years, as many as one in five of all firsttime buyers used this arrangement.

WHAT’S THE PROBLEM?

CITY watchdog the Financial Services Authority (FSA) has warned 1.3 million borrowers whose interest-only loans mature between now and 2020 that they face a ‘ticking timebomb’ — they have no way to repay the loan.

Its data suggests there are 320,000 interestonly borrowers who have missed or were late with at least one mortgage payment.

Its fear is that if homeowners can’t even afford the interest on their loan they will never be able to repay the capital. On average, homeowners with loans maturing in the next 12 years will have to pay off £59,000, according to trade body the Council of Mortgage Lenders (CML).

More than 2.5 million households will see their interest-only mortgage mature after 2020, with an average debt of £155,000 to pay off.

Many of those with loans maturing may have never put savings in place to pay them off. Others may have started with good intentions and put money aside, but ended up using this for childcare, school fees or other living costs.

Thousands more have seen their savings plans, typically an endowment, deliver far less than expected. The vast majority of endowments sold alongside mortgages were with-profits policies.

Many whose policies mature this year were told to expect upwards of £100,000 from their plans — based on a £50-a-month saving by a man who took out a policy nearing his 30th birthday.

But returns have nosedived by as much as 44 pc in recent years.

WEREN’T PEOPLE WARNED?

MANY were. Those relying on endowment policies to pay off their mortgage receive a projection letter from their insurer every two years.

These are colour-coded — red if a shortfall is expected, amber if a shortfall is likely, and green if the policy is on track to pay off the mortgage.

Despite this disappointment, some took action and put aside alternative savings. But this was not possible for those on already-stretched budgets.

Many consumers won redress for being mis-sold an endowment, on the grounds that the risks were not properly explained to them. This cash was supposed to be used to help them pay off their mortgage — but many simply saw it as a windfall and spent it.

Many borrowers missed the deadline to claim redress, and others never got the chance because of complicated regulations governing who sold them the loan.

Recently banks have been writing to interest-only customers reminding them to make plans to pay off their capital.