When I was first getting on the housing ladder in the late nineties, the idea of taking out a mortgage you never intended to pay back was pretty normal. Interest-only mortgages were widely available to first-time buyers like me. It was a good way to get us onto their books. Over time, as I did, we’d convert to a repayment version, and everyone’s happy.
In the post-financial crisis world, though, borrowing or lending debt never intended to be repaid is frowned upon. The self righteously prudent (or just plain rich) are dying to crow to those left stranded with a decreasing choice of interest-only mortgages that ‘it’s people like you who helped bring the whole house of cards down’.
They might have something else to choke on now, because the idea of a mortgage that might never be repaid is making a bit of a comeback. But in a different guise.
Some of the UK’s biggest mortgage lenders are allowing new borrowers to pay off their loans at a riper age than previously. First, Halifax/Scottish Widows said its borrowers were fine as long as they settled their debts by the age of 80 – the previous deadline had been 75. Then Nationwide followed, raising its bar by a massive ten years — from 75 to 85.
Now we’d all like to live to 80, but not all of us will. According to the Office for National Statistics, life expectancy ranges from around 75 to 87 for babies born between 2012-2014. So these changes in lending policy mean a lot of us will end up not paying off the loans on our house or flat when we die.
Is this the return of the bad old days? Tom McPhail, head of pensions research at Hargreaves Lansdown, is pretty relaxed. He said this to BBC Radio 5 Live’s Wake up to Money: ‘Why pay off the mortgage at at all? Having lent the money and let someone buy a house, why not just let it run until the day they die? As long as the value of the property is there to meet the liability in the future, why worry about paying it off when you are alive?’
Houses are getting ever more expensive. This blog, based on Nationwide data, claims houses in the UK now cost a touch over 5 times the average salary, rising to over 9 times salary in London. With the Government’s tax take also rising to pay off debts incurred in the financial crisis, if we want to still be able to buy property, we’re going to have to be allowed longer to pay it off. It means you can be approaching your 60th birthday and will have options to take out a 25-year term.
But doesn’t all this rely on the assumption that McPhail alludes to in his BBC interview – that house prices will always go up? Surely as a lender you can only lend large sums of money over a quarter of a century to someone approaching retirement if your underlying assumption is that the underlying asset will go up in value? Pensions aren’t what they were, and sadly many of us won’t live to make the final instalment.
That assumption has been tested and found wanting many times before, both nationally in the late 80s and early 90s, and also regionally after the financial crisis of 07/08. But memories are short. Nationwide says it will lend to older customers in a ‘prudent, controlled manner’. But if house prices start falling, what will happen to those mortgages? The temptation for older people to be relaxed about paying up and just to default on death will be great, leaving mortgage lenders footing the bill. Not even a decade on from the fall of Northern Rock and the mortgage market is once again straining under that age-old quintessentially British problem: too much money chasing too few houses.
Dominic Laurie is a financial journalist and former presenter and reporter at the BBC
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