If you’re facing an endowment mortgage shortfall – that is, the endowment policy attached to your interest-only mortgage is not going to be worth enough to cover the cost of the loan when it matures – it’s important to know what your options are, and to take action before it’s too late.
The challenge for lenders is to get consumers to recognise that their policy is likely to be insufficient, and to devise an alternative way of repaying their mortgage that is suitable for them, and does not put their ownership of their property at risk.
In May, we looked at some of the advice being given to consumers – including the CML’s plans to write to all interest-only mortgagors to encourage them to look again at their finances.
But one of our readers, Fantham, left a comment asking for more detail about what the CML, ABI and BBA are doing to ensure customers are treated fairly by their members – so here’s a little extra information.
Council of Mortgage Lenders (CML)
We have already noted the CML’s plans to write to all interest-only mortgagors covered by its members, urging them to address their repayment plans, and prioritising those whose endowment policies are due to mature by 2020.
In October 2012, a CML News & Views update looked at the issue in detail, confirming that:
- the CML provides a ‘risk toolkit’ to lenders, helping them to mitigate potential repayment risks;
- some lenders have already reclassified interest-only mortgages as a niche product;
- new interest-only mortgages are being offered mainly in the buy-to-let sector.
But the CML added that consumer choice and privacy are also concerns – in many cases, borrowers with interest-only mortgages will have made alternative arrangements to pay it back, whether through savings other than an endowment policy, or by selling their home to repay the loan.
The effects of inflation should also be considered, the CML pointed out, as the original value of the loan will, over time, become eroded in real terms, effectively making it less costly to pay off upon maturity.
In terms of those who already have interest-only mortgages, the CML said: “This includes a mix of interest-only borrowers who will differ depending on: the length of time they have left until their mortgage matures; their age; their income; the level of equity they hold in the property; their level of savings and other financial assets; and their future plans.
“Existing interest-only borrowers will therefore have different needs and concerns, and potential problems and solutions, depending on their individual circumstances.”
Interest-only borrowers are already contacted annually and reminded of the importance of having a suitable plan to pay off their mortgage upon maturity, and some lenders have gone further than this to remind their customers more regularly to check their financial position.
Endowment policies should be reviewed every two years, with a traffic-light system used to warn the borrower of any risk of a shortfall.
A red letter indicates a high risk of a shortfall upon maturity, and should be met with swift action by the borrower; however, if you have received a red letter about your endowment policy, it also means you have a time limit of three years in which to lodge a mis-selling claim.
Association of British Insurers (ABI)
The ABI seems more concerned about the impact of endowment policy mis-selling on the investibility of British banks and, disregarding the three-year limit on compensation claims if the lender has followed the guidelines and issued a red letter, calls for a fixed time limit on lodging a complaint of mis-selling.
In a December 2012 publication on the issue of British banks’ investibility, the ABI said: “It is clear that UK banks’ valuations are weighed down by a range of legacy issues, including PPI mis-selling provisions … interest swap mis-selling and, now, the prospect of investigations into interest-only mortgages and ‘bundled’ current account charges.
“In order to contain uncertainty around ‘conduct charges’ we would support the Confederation of British Industry’s recent suggestion that the government considers introducing a statute of limitations for all PPI claims, capping the time period during which legal proceedings can be initiated.”
While the wording of the statement applies only to PPI mis-selling, it seems likely that the ABI would welcome similar ‘statutes of limitations’ if applied to the other contentious products listed, which include interest-only mortgages and interest rate swaps, among others.
Other than this, there seems to be little mention of endowment policies with regard to interest-only mortgages – at least in public – from the ABI, which is more likely to discuss endowments in the sense of lump-sum inheritance payouts that are left to relatives upon your death.
British Bankers’ Association (BBA)
The BBA has been all but silent on the issue of endowment mortgages for several years now, at least in terms of the information they make publicly available.
Back in August 2009, they published a research report prepared by GfK Mystery Shopping entitled ‘Impact of Claims Management Companies’ Activities on Consumers of Financial Services‘.
This was largely an attack on Claims Management Companies (CMCs), calling for tighter regulation, more rules about the information they must give to potential customers (such as an insistence that call centre staff should be required to tell callers who are making an initial enquiry that their company is “regulated by the Ministry of Justice in respect of regulated claims management activities”) and so on.
However, it glossed over several of the statistical results obtained by GfK Mystery Shopping, including:
- 15% of UK adults have taken action against a bank, credit card or loan provider since April 2007;
- 10% have claimed back current account charges;
- 4% have lodged a PPI mis-selling claim;
- 3% have made an endowment mortgage mis-selling claim.
Remember, these figures date back to August 2009 – meaning the percentages are likely to have grown substantially during the years since.
Of those who had made a claim or complaint:
- 40% went directly to their bank or lender;
- 47% used a CMC;
- 30% used a solicitor.
The BBA explains away the fact that these percentages add up to well over 100% by saying “there is some overlap here, suggesting that certain consumers used more than one avenue”.
But the only likely reason for this to be the case would be if the customer initially approached their bank and had their complaint rejected, forcing them to take legal action using a solicitor or specialist CMC – something the BBA seems dead set against, based on the overall tone of the document.
Behind Closed Doors
There is limited potential to find out what discussions are still taking place behind closed doors, but from what is publicly available, it seems the CML are the most active in terms of encouraging lenders to treat their customers fairly.
However, even their guidance seems to apply only in advance, encouraging people to take appropriate action if their endowment policy is showing signs of a shortfall with several years left before maturity.
For those already coming to the end of their mortgage terms, the options are bleak, and involve a combination of:
- relying on inflation to have degraded the real-terms cost of paying off the shortfall;
- demonstrating mis-selling in order to claim compensation;
- paying the shortfall using personal savings;
- equity release or downsizing the property to one that can be paid off in full.
Beyond that shortlist, consumers are likely to need to get innovative about the way they clear the remainder of their mortgage, and while it’s hard to be sure exactly what advice lenders are being given at present, it is still the case that contacting your mortgage provider sooner rather than later, and maintaining an open dialogue, are the best ways to tackle any kind of mortgage arrears or shortfall with the lowest risk of repossession.