They lead a lavish lifestyle and always make their payments on time, so why won’t anyone give them another loan?
Edward and Melanie Rom run a multimillion-pound travel business and are no strangers to champagne parties, luxury golf resorts and private jets.
Yet their lender, Barclays, has refused to give them a mortgage on their family home, a five-bedroom detached house in Aldenham, Hertfordshire, because it says that they can’t afford a new deal.
Edward, 57, and Melanie, 53, bought the £1.75 million house with a 30 per cent deposit in 2010, taking out an interest-only mortgage with Barclays on a ten-year term. They have been on an interest-only deal at a rate of Base Rate plus 0.73 per cent since 2015 and haven’t missed a single £844-a-month payment.
The couple say the property was their dream home, nestled in a development of properties worth millions, with an exclusive gym and tennis courts and surrounded by woodland. They hope to sell the house eventually and use the proceeds to pay off the loan. They opted not to go for a repayment mortgage because their money is tied up in their business.
Their loan term was due to end in September, but Edward thought it would be easy to get another loan to cover their £1.2 million debt with Barclays, where he has banked for nearly 20 years. He phoned the bank a few weeks before the deal elapsed and submitted a new mortgage application.
A few weeks later underwriters at Barclays decided that the couple could not afford a new mortgage on the same terms, saying that Edward had failed affordability checks. While his company, EFR Travel, based in Richmond-upon-Thames, southwest London, makes more profit than it did when he last remortgaged, his earnings have dipped since March because of the pandemic.
Edward has £4.5 million in a business account with Barclays and a six-figure sum in his personal account, but the lender demanded that he pay back the loan in full at the end of its ten-year term.
Edward complained to Barclays, which has now given him until October 2021 to repay, but has increased the interest rate on the outstanding amount to the bank’s standard 3.5 per cent, taking the monthly repayments to more than £3,600.
It offered him a mortgage payment holiday, meaning that the interest accrued would be added to the loan, but he has refused. “Barclays won’t give me a mortgage but expects me to pay this higher amount, which I am able to do and am doing,” he said.
Interest-only mortgages, where the debt remains the same at the end of the term and borrowers have to find another way to pay it off, were once the most popular type of mortgages but have become the preserve of the wealthy since tougher restrictions after the credit crunch.
Those wealthy borrowers, such as the Roms, now face becoming a new breed of mortgage prisoner: business owners and financiers whose incomes have been hit by the pandemic and so cannot move their interest-only loan to a cheaper deal.
More than 1 million household mortgages were interest-only in 2019, according to the trade body UK Finance, with a further 318,000 part interest-only and part-repayment. They have become much harder to get since 2008, with many lenders requiring borrowers to have cash savings equivalent to the loan’s value.
There are fears that those already on interest-only deals may be unable to extend their mortgage because of strict lending curbs by banks and building societies. Many are asking business owners to prove that their income has not been affected by the coronavirus pandemic and are excluding bonus income from affordability calculations.
NatWest, for example, requires a sole income of £75,000 or a joint income of £100,000 for a borrower to qualify for an interest-only mortgage, while Coventry Building Society will only consider borrowers who have 50 per cent equity in their homes.
Edward said that when taking out an interest-only loan he was never asked to set down how he would repay the balance at the end of the deal.
“They’ve been so rude and abrupt and off-hand, talk about putting the nail into the coffin of a loyal customer. My biggest problem is that I’ve been kicked in the teeth by Barclays, and now there are no options on the market.
“The stupidity of being told I can’t afford a mortgage but to pay £3,600 a month really takes the biscuit.”
Barclays said that Edward was given plenty of notice to prepare for the end of his mortgage term and that an assessment of his income and expenditure meant he did not pass its affordability checks. It said: “As a responsible lender we are obliged to ensure customers can continue to meet payments throughout their mortgage. We have been in contact with Mr Rom to discuss the support options available.”
Interest-only loans have suited business owners and bankers, who might have variable incomes, because they keep monthly payments low while allowing them to pay down the debt when they get a cash windfall, such as from company dividends or a bonus.
In the 1980s and 1990s they were particularly popular and were sold alongside endowment investment policies, with the idea that the investment would grow big enough to clear the loan at the end of the term — with some money left over.
However, they were widely mis-sold, and millions of plans failed to deliver on their promises, leaving people with loans they could not afford to repay. Other borrowers without endowment policies were caught out because they failed to set aside savings or relied on generating enough equity in their homes to pay off their loans.
In 2014, when banks tightened the rules on what income could be used to apply for a loan and what customers could borrow, tens of thousands of mortgage prisoners found that they were unable to get new loans, despite having always made their payments on time.
Some were forced to pay higher mortgage rates by their lenders because they could not pass revised affordability rules and would not be taken on by any other banks.
“Interest-only deals are still very much a part of the mortgage market but have landed some borrowers with problems later in life,” said David Hollingworth from the broker London & Country. “When the term comes to an end it’s not simply a case of rolling on to a new deal, you’re effectively applying for a new mortgage.”
The Financial Conduct Authority estimates that there are 200,000 mortgage prisoners, many with interest-only mortgages. Some are stuck with unregulated lenders that bought bad loans as an investment when they were sold off in bundles before the financial crisis. They pay far higher rates than those charged by the high street banks and can’t get a new deal because of affordability rules, even if it would mean paying less.