‘Mortgage Prisoner’ is something we’re hearing a lot more in the media today. And it is forecast that we will be seeing a lot more over the next 5-10 years. But how serious is it? And what does it actually mean? To broadly understand this (rightly) alarming phrase, I should clarify a couple of commonly used Mortgage terms and re-live a little history.
Firstly, I’ll explain the two types of mortgages that are, or have been, available. The main mortgage offered today on almost all residential homes is a Capital and Interest Mortgage (also known as a Repayment Mortgage.) For easy maths, let’s say you borrowed £100,000 over a period of 25 years. A Capital and Interest Mortgage is designed to be fully paid off at the end of the 25 year term. Your payments consist of the capital borrowed and accrued interest which slowly reduces your balance to zero for the end of the term. This is important because at the end of the mortgage term, the lender requires the balance to be fully paid. Before lending, the bank will assess your affordability and ensure that you can borrow the sum. This moves us on to the other type of mortgage:
The other mortgage type is known as Interest Only. These proved very popular up until the financial collapse in 2008 and are now very rarely available to homeowners. Using the same capital example, in this instance you would borrow £100,000 over 25 years however you would only make the interest payments and your balance would stay the same. Just making the interest payments (rather than any capital) meant that the monthly savings were significant (about a third of a repayment mortgage!) Borrowers who took this type of mortgage would have normally taken out an investment vehicle alongside it known as an Endowment policy. These were designed to run alongside your mortgage and eventually achieve the capital value to be cashed in. A great idea in theory, however, the endowment policies were invested in things like stock market performance which unfortunately performed terribly. This led to the value of these endowments being significantly lower than capital values owed and a shortfall for borrowers that come to the end of their mortgage term. As stated above, it’s important to remember that the lender wants the capital paid back at the end of the term.
So what is a mortgage prisoner?
Imagine you are coming to the end of your Interest Only mortgage term and you owe that £100,000 but your investment/savings vehicle is worth a lot less than that. The bank is going to want every penny of the capital back, so what are your options if you can’t remortgage? This is the troubling time that potentially up to a quarter of a million people are facing over the next 5 years alone, the inability to pay back the bank in time. Many are faced with the only option of ‘Trading down’ which is not just financially difficult, but can be really heart-breaking having to leave a family home.
How can we help?
If you think that this applies to you, or are worried it soon will be, please get in touch as soon as you can. There are products out there designed to help people before it gets too late. We will work tirelessly on your behalf to ensure we can give the best advice and guidance.