Interest-only ticking time bomb

Gemma Harle is managing director of TenetLime

Banks are researching how much exposure they have to interest only lending - no small task when you consider the volumes written since its inception.

Initially conceived to be sold with endowment policies, the relaxation of regulations that ensured borrowers had repayment vehicles in place combined with the collapse in endowment performance from 2000 onwards to bring the product into the mainstream as a loan for buyers who were struggling with affordability.

Assessing the problem of course is the easy part. Once the banks have a true grasp of their exposure to their maturing interest only mortgages, they will need a strategy to deal with them and the many borrowers for whom the realisation that the capital remains outstanding at the end of the term will have come as a shock.

The banks should not expect a free hand here. Neither government nor regulator will tolerate banks who repossess elderly borrowers, whom they will consider, in many cases, victims of mis-sold loans. Indeed after the inevitable finger pointing, it’s entirely likely that lenders, like endowment product providers before them, will be forced to bear the consequences of this lending.

After all, interest only was sold with equal enthusiasm and abandon through branch and intermediary channels. The options include possible equity release type schemes, remortgaging, or worst case writing off the loans.

In any case, I would argue that borrowers will need plenty of advice.  An industry wide issue deserves an industry wide response and this is an ideal opportunity for lenders and intermediaries to get together and design a solution.