MSE News: Interest-only mortgage timebomb warning: act now

buddyboo

When we took out our mortgage we were advised to take out a pension linked mortgage as my husband is self employed. The lump sum from the pension would pay off the mortgage and my husband would receive a pension. This seemed sensible some 25 years ago but after hearing about difficulties with endowment policies, we changed our mortgage to part interest only/part repayment - we couldn't afford to do more than a 50/50 split as we had a young family. We imagined that the policy which was originally designed to pay off the full £60,000 mortgage would be certainly enough to pay £30,000.

The bank has now asked us how we intend to pay off the £30,000 so got in touch with the pension providers only to be told that the lump sum is not even £30,000 and also that we cannot touch this until my husband is 60 years old.

I have seen adverts saying that if you are 55 or older you can obtain the lump sum from your pension but the pension provider says we cannot. Who is right?

I believe we were mis-sold the pension linked mortgage but do not know if we can claim like those who were mis-sold PPI policies - are we too late?

jamesd

buddyboo, 25 years ago inflation was higher. Since many investment returns are also higher at a time of high inflation but mortgage balances do not grow with inflation, that makes it easier for investments to grow to pay off a mortgage in high inflation times. Since then we've switched to low inflation. That means that people using investment backed repayment strategies would need to increase the amount they are investing to pay off the mortgage, to allow for the reduced inflation benefit. This is one of many reasons why it's necessary for those with interest only mortgages to regularly monitor and adjust their strategies.

The current rules are that a lump sum is available from age 55, it was 50 a couple of years ago. You appear to have a plan with different rules and the specific rules of your own plan are the ones that govern what you can do.

It isn't very likely that you are worse off than you would have been with a repayment mortgage because you would have been receiving both tax and investment gains that are not available with a repayment mortgage.

Have you been increasing the payments into the pension with inflation each year, as is normally expected with pension investing? If not, what happens is that the real (after inflation) value of the pension ends up being closer to the income levels or 25 years ago instead of today. It's easy for people to forget to or neglect to do this and then be surprised at the result.

Why do you believe you were mis-sold the pension-backed mortgage? The original reasoning you gave was and is still correct. So far you haven't given a reason that would be a mis-sale. Did you know that the value of investments goes up and down and that you needed to monitor it and adjust payments? Were you making the expected regular inflation-linked increases in the amount paid in? You seem to have done at least some adjusting based on reported investment performance for others, which tends to suggest that you were aware. Not knowing that investment values vary and that you need to monitor regularly would be the sort of thing that could make it a mis-sale. You're probably way too late buy now, even if it was.

The lump sum being able to do some paying off would normally have been at the projected end date, which seems to be age 60 for your husband. I don't know how far in the future that is.

You and he might usefully benefit from starting a discussion in the pensions section here and discussing your retirement planning to see what can be done about that. I'm worried that you may have done little more than starting a plan with low by today's standards payments 25 years ago with an expectation that those non-increased amounts could pay a reasonable pension.