Short-term loans are a solution for borrowers with outstanding balances at the end of the mortgage – Rubins

There was a time when a mortgage coming due was cause for celebration.

After 25 years of repayment of the loan to the building society – after often many years on a standard variable rate – the last monthly installment would be paid, the balance settled and the house in freehold. Borrowers could celebrate with a bottle of champagne as they studied their property deeds firsthand.

These days things are often very different and don’t provide a reason to open the fizz. Unfortunately, many people come to the end of their mortgage term with an outstanding balance that they are unable to pay. and many cannot remortgage either.

Rise and fall of interest-only mortgages

Of course, the main cause of this predicament is the interest-only mortgage. While they rose to prominence in the 1980s with the rise of the endowment mortgage, their popularity outlasted endowments and the subsequent mis-selling scandal.

While the numbers are steadily falling, the most recent statistics from UK Finance show that there were still 908,000 ‘pure’ interest-only mortgages outstanding at the end of 2020.

The good news is that the number of interest-only loans set to mature by 2027, the second tranche of interest-only loans identified by the Financial Services Authority (FSA) in previous research, fell by 56,000 in 2020. to reach 457,000 loans, a fall of 10.9%; but that still leaves a huge number of borrowers who could find themselves in serious trouble over the next five years.

Options for borrowers

The sad reality is that, despite all efforts to convince them otherwise, borrowers generally don’t believe their mortgage lender won’t offer them a refinance at the end of their term.

If they have bad credit, are deemed too old, or lack the required income, the borrower may simply not qualify for a term extension. And other lenders may also be discouraged.

So what are the other options available? First, an estate sale. If the borrower has another property they could sell, they could use the proceeds to pay off the mortgage. Otherwise, they might sell their house and downsize. However, this option can take several months.

Other options may include using a pension, savings or other investments to raise funds. Unfortunately, many borrowers simply won’t have enough (or none) to cover their mortgage deficit.

The only real option is to sell and reduce or lease, but time is running out.

A moment of judgment will be upon the borrower before they know it. They can quickly be notified by their mortgage lender that possession proceedings have been initiated. A frantic phone call to the lender later and they will realize that the mortgage company is not being vexatious, but simply following the procedures required by the regulator.

Short-term loans can provide “respite”

However, all is not lost. In such circumstances, short term loans can be the solution. Using a regulated bridging loan can provide the borrower with some much-needed respite to find a suitable solution rather than making a distressed decision. They will then have a window for a broker to possibly find a longer-term financing solution (like a retirement loan product) or it will give them time – up to 12 months – to sell the home.

At Alternative Bridging Corporation, we come across many such cases. As long as a lender can be sure of the exit strategy, they can act quickly to avoid possession proceedings and keep the borrower with a roof over their head.

This is just one of many real-life scenarios that bridge financing can play its part in solving and can provide real cause for celebration.

Jonathan Rubins, director of Alternative Bridging Corporation

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