How did we end up with retired people without repayment vehicles for their interest-only mortgages

In the last few weeks, we have seen an alarming piece of research about mortgages and the elderly yet I have heard very little from the financial services industry. It may be somebody else’s problem but is that because of a failure of regulation.

A report by the Personal Finance Research Centre and the International Longevity Centre UK suggests that one third of the over 70s with mortgages have interest only mortgages with no repayment vehicle.

Four in ten of the oldest mortgaged households have at least one interest-only mortgage without a linked investment to repay the loan, compared with six per cent among the under 55s – a reflection of changing times and changing policies.

There are other results in this survey that suggest a failure of the mortgage industry or a failure of a banking system for allowing people to keep remortgaging into higher debt which at best saw borrowers marking time on these loans, when they should have been getting closer to paying them off as they got older. (Something for the Help to Buy generation to think about at least).

Yet what is missing is adequate help. I would contend that this may be because of the history of regulation of interest only mortgages and of the associated endowments.

One could argue that along with the national newspapers, the FSA allowed an atmosphere to develop where people believed it was best to cash in their endowments, take their advisers to cleaners over shortfalls and ultimately forget that the loan component, which dealt with the interest only really worked when  associated with some sort of repayment vehicle.

It is clear that the economics turned on the idea of meeting the capital sum in some way. Of course, the blame does not just lie with regulation. The marketing, investment and actuarial departments of the life sector did not slam the brakes on fast enough when it became clear endowments might not necessarily pay out. Some advisers may have continued to recommend the products for too long into the crisis.

But the furore, the naming of it as a scandal, when arguably it wasn’t, created an environment where people were excluded from investment advice when it was needed. And they believed they could get a decent price for their second hand endowment policy and then spend it on a holiday or other sundry expenses of luxuries and somehow then be okay when it came to the mortgage.

What could have been allowed but was never countenanced by the powers that be, was for investment advisers and fund managers needed to offer their asset management capabilities as explicit repayment vehicles to meet the gap. But with the flashing of regulatory traffic light letters, the urgings of the TEP market and the understandable wariness of investment advisers one can see how we got here.

Now we have a bad outcome for consumers for whom it may all be a little too late even if IFAs were prepared to service them post RDR.

As I said earlier, one can blame the mortgage industry, insurers and IFAs to some degree. But when it comes to the investment component, there is an argument to say that the failure rests with the regulator beset by the national newspapers for preventing investment advisers and the investment industry doing its job and now we have pe0ple in their seventies not able to pay off the capital sum. Oh dear. As always comments welcome.

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