Consumer Research
56
Financial Services Authority
Interest-only mortgages – consumer risks
Prepared for the Financial Services Authority by IFF Research Ltd
December 2006
Financial Services Authority
Interest-only mortgages – consumer risks
Prepared for the Financial Services Authority by IFF Research Ltd
December 2006
Acknowledgments
The research project was carried out on behalf of the FSA by IFF Research Ltd.
The research project was managed by Errol Walker at the FSA. Tel: 020 7066 0814, e-mail: errol.walker@fsa.gov.uk
Copies of the report can be downloaded from the publications section of the FSA website http://www.fsa.gov.uk/Pages/Library/Other_publications/Consumer/index.shtml
Contents
1. Executive summary ......................................................1
1.1. 1.2. 1.3. 1.4. 1.5. Methodology............................................................................. Conclusions.............................................................................. The repayment intentions of borrowers .......................................... Profile and mortgage characteristics .............................................. Consumers’ understanding of interest-only borrowing ........................ 1 2 2 3 3
2.
Introduction ...............................................................4
2.1. 2.2. Methodology............................................................................. 4 Report structure ....................................................................... 5
3. 4. 5.
Profile of mortgagors ....................................................6 Characteristics of mortgage .......................................... 11 Repayment vehicle..................................................... 15
5.1. 5.2. 5.3. Group 1.................................................................................. 16 Group 2.................................................................................. 18 Groups 3 and 4 combined ........................................................... 21 Understanding of interest-only mortgages ...................................... 24 Reasons for choosing an interest-only mortgage ............................... 25 Benefits of an interest-only mortgage ............................................ 27 Drawbacks of an interest-only mortgage......................................... 28 Awareness of risks associated with interest-only mortgages and repayment plans ...................................................................... 30 Awareness of the lender having the right to sell the house ................. 30 Awareness of risks relating to reliance of investments/savings............. 31 Awareness of risks relating to reliance on future bonuses................... 32 Awareness of risks relating to the sale of the property ...................... 33 How borrowers chose their mortgage and whether advice was given ..... 34 How advice given and what was discussed ...................................... 36
6.
Understanding of mortgages ......................................... 24
6.1. 6.2. 6.3. 6.4. 6.5. 6.6. 6.7. 6.8. 6.9.
7.
The decision-making process ........................................ 34
7.1. 7.2.
8. 9.
Conclusion ............................................................... 41 Appendix – technical report .......................................... 42
9.1. 9.2. 9.3. 9.4. 9.5. Methodology............................................................................ 42 Pilot ...................................................................................... 42 Sample profile and weighting ...................................................... 42 Response rate.......................................................................... 42 Questionnaire.......................................................................... 42
1.
Executive summary
The Financial Services Authority (FSA) requires product provider firms to supply data on product sales each quarter. This Product Sales Data (PSD) is used to monitor trends in the market for supervisory reasons and to help identify trends/changes in consumer behaviour. Product sales data shows that around 19% of all new mortgages are written on an interest-only basis with no record of a repayment vehicle in place. Interest-only mortgages are not considered suitable for all borrowers, and consumers may be at risk if they do not understand the implications of holding an interest-only mortgage without a strategy for repaying the capital. IFF Research Ltd was commissioned to conduct research amongst borrowers with an interest-only mortgage where the repayment vehicle is unknown. The objectives of the survey are to: • • • establish the repayment intentions of borrowers; establish the extent of consumers’ understanding of interest-only borrowing; and identify the characteristics of these borrowers.
The results of this study will assist the FSA in determining whether there is cause for concern which may warrant further regulatory activity.
1.1. Methodology
Telephone interviews were carried out with 857 borrowers who had taken out an interest-only mortgage in the nine months before the survey, where the PSD returns showed no repayment vehicle was in place. The interviews were conducted during September 2006. The study was developed with the aim of categorising borrowers into four distinct groups based on their plans for paying back the loan.1 • • • • Group 1 - those with a recognised repayment vehicle in place (ISA, endowment or pension fund). Group 2 - those with no recognised repayment vehicle in place but with other savings, investment plans or strategies in place. Group 3 - those with no recognised repayment vehicle in place but a rough idea of how they may repay the loan. Group 4 - those with no recognised repayment vehicle in place and no idea of how they will repay the loan.
1
A full version of the questionnaire used can be found in the appendix.
1
1.2. Conclusions
The sample showed variation across a number of characteristics, demonstrating that holders of interest-only mortgages were not a homogeneous group. Variations were found in terms of their age, income levels, loan-to-value ratio and the size of the loan. A significant minority of borrowers had no idea or definite plans on how they would pay back the capital they borrowed. A large proportion of these borrowers admitted that dealing with finance was best left to the experts, and many had taken an interest-only mortgage because it was recommended to them by a professional. They are potentially at risk since they were also significantly less likely to fully understand the product they had bought and the risks involved. The majority of borrowers who had an interest-only mortgage but no repayment plan marked on their PSD return did have a recognised repayment plan or other strategy in place to pay the loan back. However, in a number of cases the credibility of this repayment strategy may be open to question. The ability to meet their mortgage payments and other commitments is a consideration for mortgage holders; one in five respondents said that they would struggle to meet other financial commitments if interest rates rose by one percentage point. A high proportion of respondents had a correct understanding of an interest-only mortgage and the majority had a reasonable understanding of the risks associated with their repayment strategy.
1.3. The repayment intentions of borrowers
Although all borrowers included in the survey had no repayment vehicle recorded on the PSD return, when surveyed 22% claimed to have a recognised repayment vehicle (group 1). Endowments (51%) and/or an ISA (47%) were the most common repayment vehicles. The largest proportion (65%) of borrowers fell into group 2; they had no recognised repayment vehicle in place but claimed they had other plans and strategies to pay back their mortgage. More than two in five of this group planned to use monies from property sale2 and 16% planned to switch to a repayment mortgage later. A significant proportion of this group plan to sell the mortgaged property despite the property having a high loan-to-value ratio. A further group planned to switch to a repayment mortgage; however, for many they would no longer have the option of a conventional 25-year term without taking the mortgage into retirement.
2
Any property sale including both the mortgaged property or any other properties.
2
A significant minority (13%) of borrowers fell into groups 3 and 4: eight and five per cent respectively.3 This group were more likely to be in social grades C2DE; to think that finance is best left to the experts; and be more reliant on professional advisers. They were also more likely to be first-time buyers or say that they struggled with their mortgage repayments from time to time.
1.4. Profile and mortgage characteristics
Borrowers were fairly evenly split between the four age categories used. The most common purpose of the loan was a re-mortgage (52%); 29% were home movers and 12% were first-time buyers. The majority of borrowers went through an intermediary (70%). Among first-time buyers nearly all used an intermediary (96%). The main reasons for choosing an interest-only mortgaged revolved around its cost or affordability. Over half (51%) of borrowers spontaneously said they chose the mortgage because the monthly repayment was lower, and one in five (19%) said it was because it was the only one that they could afford.
1.5. Consumers’ understanding of interest-only borrowing
Understanding of the key aspects of interest-only mortgages was high; the majority of borrowers (92%) understood what was meant by an interest-only mortgage, and most borrowers had a reasonable understanding of the main risks associated with this type of mortgage. All borrowers were asked to rate how knowledgeable they felt themselves to be about personal finance in general.4 Eighty three per cent described themselves has having a reasonable or very good knowledge, with just under a fifth (17%) expressing the view that ‘finance was best left to the experts’. Nearly all borrowers planning to use savings or investments to repay their capital (92%) claimed they were fully aware that they had to monitor their investments; of the borrowers planning on using the sale of property, two-fifths (41%) felt that there were no risks involved in such a strategy. The majority of respondents (84%) claimed they were given advice during the course of choosing their mortgage. However, newly available PSD returns suggest that around 70% of the interest-only market is on an advised-sale basis.
3
If this percentage was applied to the latest PSD returns for the year to Quarter 2 2006, it would equate to around 58,000 borrowers in the year. Financial sophistication was self defined by borrowers. All borrowers were asked which of three statements relating to finance best described them.
4
3
2.
Introduction
The Financial Services Authority (FSA) requires firms to provide data on product sales each quarter. This Product Sales Data (PSD) is used to monitor trends in the market for supervisory reasons and to identify trends/changes in consumer behaviour. The PSD returns for mortgages have shown an increase in the number of interest-only mortgages sold where the repayment vehicle is not stated. Interest-only mortgages are not considered suitable for all borrowers, and consumers may be at risk if they do not understand the implications of holding an interest-only mortgage without having a strategy in place for repaying the capital at the end of the term. IFF Research Ltd was commissioned to conduct research amongst borrowers with an interest-only mortgage where the repayment vehicle is unknown, to determine their repayment intentions and their personal and financial circumstances. The results of this study will help assist the FSA in determining whether there is cause for concern which might warrant further investigation of the issue and/or regulatory action. More specifically the objectives of the research were to: • • • • validate the PSD returns by establishing the intended repayment methods (if any); examine the extent to which borrowers understand the implications of holding an interest-only mortgage without a repayment vehicle and the risks posed; establish whether consumers believe they received advice as part of the sale process; and identify the basic demographic profile of these borrowers, including economic and occupational characteristics and high-level information about their mortgage.
2.1. Methodology
In total, 857 interviews were conducted by telephone with borrowers who had recently taken out an interest-only mortgage and the PSD returns showed no repayment vehicle had been recorded. All borrowers were sampled randomly from the Quarter 4 2005/6 PSD returns. All borrowers had therefore bought their mortgage in the last nine months. As the PSD return does not contain contact details of customers, these needed to be obtained from providers. To minimise the burden on providers, nine firms were selected to assist with the research. The providers chosen reflected a good mix of the mortgage lending market. All the borrowers selected for interview were customers of these nine providers.
4
The sample of achieved interviews was structured and weighted to represent the profile of borrowers in the last quarter’s PSD returns by age, channel, loan size, and mortgage purpose. Fieldwork was conducted between 4 and 26 September 2006. Further details of the methodology and sample profile and a copy of the questionnaire are provided in the appendix to this report.
2.2. Report structure
The remainder of this report presents the main survey findings and is structured as follows. Where possible, results have been analysed by key sub-groups. • Chapter 3 - Profile of mortgagors Briefly describes the demographic profile of the borrowers surveyed. • Chapter 4 - Characteristics of mortgage Briefly describes the main characteristics of the mortgages held. • Chapter 5 - Repayment vehicle Examines the proportion of borrowers who already have a repayment vehicle in place, those who have some plans to repay the capital, and those who have no idea how they will pay their mortgage back. It examines in detail the key demographics of each group by the types of plans and strategies in place. • Chapter 6 - Understanding of mortgages Examines the level of understanding of interest-only mortgages, including what are perceived to be the main benefits and drawbacks of an interest-only mortgage. • Chapter 7 – Decision-making process Examines how the decision to take an interest-only mortgage was reached and what advice (if any) was given during the decision-making process. • Chapter 8 - Conclusions
The results presented in this report are based on weighted data and presented in graphical and tabular format. In some cases tables may add to 99% or 101% due to rounding. Base sizes for some sub-groups are low (under 100). In these cases results should be treated as indicative only. All comparisons within this report described as significant have been tested at the 95% confidence level.
5
3.
• • •
Profile of mortgagors
key demographics including age, household composition and income, social grade, and financial sophistication; type of mortgage and purchase channel; and whether they have any other (unsecured) borrowings.
This chapter briefly describes the profile of the mortgagors surveyed by:
All data presented in this chapter and throughout the rest of this report are weighted to represent the profile of mortgagors with an interest-only mortgage. The weighting is based on the last quarter’s PSD returns. Full details of the weighting can be found in the appendix. Chart 3.1 shows the age of borrowers along with the type of mortgage they had taken and the channel they used to buy it. Chart 3.1: Profile by age, type and channel
Age
19% 27%
Type
7% 12%
29% 22% 32% 52%
Channel
Under 35 35-44 45-54 55+
30%
First time Home mover Remortgagor Other
70%
Direct Intermediary
Base: All respondents (857)
The age of borrowers was relatively evenly split with just over a quarter (27%) aged under 35, a third (32%) aged between 35 and 44, just over a fifth (22%) aged between 45 and 54, and a fifth (19%) aged over 55. 6
The most common type of mortgage purchased was a re-mortgage, indeed half of all borrowers (52%) had re-mortgaged. Three in ten (29%) were home movers and one in eight (12%) were firsttime buyers. A small proportion (7%) had another type of mortgage and this category included council/RSL tenants exercising their right to buy. Most borrowers who re-mortgaged did this to enable them to obtain a better rate (41%), and just over a fifth (22%) did so to release money/equity from their property. Other reasons mentioned included consolidating debts and financing home improvements. Perhaps unsurprisingly younger borrowers tended to be first-time buyers (29% of those under 35 were first-time buyers) whereas middle-aged borrowers were more likely to have re-mortgaged (64% of borrowers aged between 45 and 54 had re-mortgaged). In terms of how the mortgage was bought, the majority of borrowers went through an intermediary (70%). Again, age played a large role in which channel was chosen, with older borrowers more likely to have gone direct (43% compared with 30% overall). Conversely, younger borrowers (aged under 35 years) were more likely to have gone through an intermediary (76%). As those aged under 35 were more likely to be first-time buyers it is of no surprise that nearly all (96%) first-time buyers went through an intermediary. This is shown in table 3.1.
Table 3.1: Channel by age and borrower type Age All Borrower type
Under 35
3544 % 298 274 26 74
4554 % 208 189 32 68
55+
First time % 86* 103 4 96
Home mover % 229 249 25 75
Remortgage % 520 446 38 62
% Base: unweighted group 2 Base: weighted group 2 Direct Intermediary 857 857 30 70
% 225 231 24 76
% 126 163 43 57
*NB: small base size, indicative only
7
Chart 3.2 shows the household size and how many children live in the household. It also shows the marital status of borrowers and the ownership of the mortgaged property. Chart 3.2: Profile of household size, make-up and ownership
Household size
11% 20%
Marital status
4% 28%
20% 29% 19%
1 2 3 4 5+
53% 15%
Married Cohabiting Single Other
Base: All respondents (857)
Base: All respondents (857)
Number of dependent children
1% 8% 24% 44% 0 1 2 3 4
Ownership
Owned by respondent Joint owned
46% 54%
22%
Base: All respondents with more than one person in the house (unweighted 678, weighted 690)
Base: All respondents (857)
A fifth (20%) were single households and around half (48%) had between two and three people in the household. One in nine (11%) households had five or more people living within it. The majority of households (56%) had at least one dependent child (of those with children most had one or two living in the household). Four out of five borrowers (81%) were either married (53%) or cohabiting (28%). Ownership of the mortgaged property was fairly evenly split, with just over half (54%) jointly owning the property and 46% of borrowers solely owning the property. A third (31%) of borrowers who solely owned their property were either married or cohabiting with a partner.
8
Chart 3.3 shows the household income and social grade of borrowers. Chart 3.3: Profile of income and social grade
Household income
Social grade
13%
29%
36%
AB C1 Over £100k
40%
38%
£50k-£99k £25k-£49k
C2
15%
DE
12%
Under £25k
10%
Refused 6%
Base: All respondents (857)
Half of all borrowers (49%) had a household income of £50,000 or more per annum. These were more likely to be households with joint incomes (62%) and those where the borrower was aged between 45 and 54 years old. The latter group were the most likely to have an income of over £100,000 per annum (19% compared with 13% overall). As would be expected, household income differs significantly by age of borrower. As noted above those aged between 45 and 54 were most likely to have the highest income, whilst those aged under 35 were more likely to have an income of between £25k and £49k. Reflecting that borrowers over 55 are more likely to be retired, this age group was the most likely to have a household income of under £25k (26% compared with 12% overall). In terms of social grade, seven out of ten (69%) borrowers were ABC1. Social grade is highly associated with income so it is of no surprise that those with an income of over £100k were more likely to be AB (51% compared with 29% overall) whereas those with an income of under £25k were more likely to be DE (19% compared with 10% overall).
9
The final section of this chapter shows how knowledgeable borrowers believe themselves to be about finance in general and looks at the level of other loans and debts held by borrowers. This is shown by Chart 3.4 Chart 3.4: Financial sophistication and other loans and debts
Financial sophistication
17%
Loans and debts
11% 9%
25%
59%
12%
Over £20,000
Leave to experts Reasonable knowledge
£10,000-£19,999
39%
£2,000-£9,999 Under £1,999 None
24%
Very good knowledge
4%
Refused
Base: All respondents (857)
Financial sophistication was determined by how knowledgeable borrowers felt themselves to be about finance in general.5 Three in five borrowers (59%) felt that they had a reasonable knowledge of finance. Just under a fifth of borrowers (17%) believed that ‘finance was best left to the experts’. These borrowers were more likely to have an income of under £25k (26%), be in the lower social grades (24% C2DE), and be much less likely to have bought their mortgage direct (8%). The remaining quarter of borrowers (24%) believed that they had very good financial knowledge. These were more likely to have a household income in excess of £100k (44%) and to be in the higher social grades (28% in social grades AB). There were few significant differences by age with the exception of borrowers aged between 45 and 54, who were the more likely to believe they had very good financial knowledge (30%). Two-fifths (39%) of borrowers claimed that they had no other loans or debts (other than their mortgage). These borrowers were more likely to be aged over 55 (55%). A quarter (25%) of borrowers had other debts of between £2,000 and £9,999, and one in nine (11%) had other debts of over £20,000. Younger borrowers (71%) and first-time buyers (also 71%) were more likely to have other debts.
5
Financial sophistication was self defined by borrowers. All borrowers were asked which of three statements relating to finance best described them.
10
4.
Characteristics of mortgage
Having examined the profile of mortgagors, this chapter briefly discusses the main characteristics of the mortgages purchased. This includes the loan value, loan-to-value ratio (LTV), term, repayments and the deposit placed. Chart 4.1 shows the loan value and LTV ratio of mortgages bought. Chart 4.1: Loan value and LTV ratio of mortgage
Loan value
11% 15%
LTV ratio
1% 16%
22% 17%
26%
£300K+
34%
100% +
£200K-£299K
90 - 99%
£150K-£199K
80% - 89%
31%
£100K-£149K
27%
50% - 79%
Under £100K
Under 50%
Base: All respondents (857)
Three out of ten borrowers (31%) had a loan of under £100k. Unsurprisingly these were more likely to be borrowers with the lowest household income (91% of those with an income of under £25k had a mortgage of under £100k). Those aged over 55 were also more likely to have a loan of under £100k (55%) although this is undoubtedly linked to income. (As highlighted in the previous chapter those aged over 55 were more likely to have a lower income.) One in nine borrowers (11%) had a mortgage of over £300k. Again this varied by income, and threefifths (58%) of those with a household income of over £100k had a mortgage of over £300k. Most households (58%) had a loan of between £100-299k. These included first-time buyers who were most likely to have loans of between £100-199k (55%). First-time buyers were the least likely to have a mortgage of over £300k (only 4% of first-time buyers had a mortgage in this category).
11
Home movers were the most likely to have the highest loan values; a third (33%) had a loan for over £200k compared with 26% overall. In terms of LTV ratio, this also varied significantly by age, type of mortgage and income. Although at an overall level only one in six (17%) had an LTV ratio of 90% or more, this figure was much higher for first-time buyers (39%) and those under the age of 35 (28%). At the lower end, only 27% of borrowers had an LTV value of under 50%. These were more likely to be older (55%), re-mortgagers (33%) and those with loans of under £100k (61%). They were also more likely to be those who bought their mortgage direct (49%). The term, repayments and deposit paid on the mortgage are summarised in chart 4.2. Chart 4.2: Term of mortgage, monthly repayments and deposit paid
Term
4%
Repayments
19%
Deposit
45%
57%
42%
26 years or more
Over £1,000 £500-£999
Over £10,000
26%
21 to 25 years 11 to 20 years 10 years or less DK
6% 11%
£5,000 £9,999 £1-£4,999 No deposit
21%
£300-£499 Under £300
23% 2%
22%
DK
16%
DK
3%
4%
Base: All respondents (857)
Base: All with new mortgage (unweighted 362, weighted 403)
Half of all borrowers (49%) had a term of over 20 years, a quarter (26%) had a term of between 11 and 20 years and the remaining 23% had a term of less than ten years. Borrowers with a term of between 21 and 25 years were more likely to be younger (65% of those under 35 had a term of between 21 and 25 years) and first-time buyers (59% of first-time buyers had a term of between 21 and 25 years). Borrowers with a lower loan value were the most likely to have the shortest term (34% of those with a loan value of under £100k had a term of less than ten years compared with 23% overall). There was wide variation in the amount repaid each month, whilst the majority (63%) repaid somewhere between £300 and £999 each month, significant proportions paid less than £300 (16%) or more than £1,000 (19%). 12
As would be expected, borrowers with the highest incomes (and therefore the highest loan values) were the most likely to repay more than £1,000 per month. Four out of five (81%) borrowers with a loan worth more than £300k repaid over £1,000 each month. First-time buyers were the most likely (54% compared with 42% overall) to be repaying between £500 and £999 each month. Only borrowers who purchased a property, i.e. first-time buyers or home movers (around half of all borrowers), would have paid a deposit. Of borrowers who purchased a property, just over a fifth (22%) paid no deposit at all. These were most likely to be borrowers aged over 55 (40%). Most (57%) borrowers who purchased a property paid a deposit of over £10,000. Home movers and those with an income of over £100k were the most likely to have paid a deposit of over £10,000 (70% and 66% respectively). The final section of this chapter examines how easy borrowers said they were finding it to keep up with their mortgage payments and how easy they think they would find it if their monthly repayments increased due to a 1% increase in mortgage rates. This is shown in Chart 4.3. Chart 4.3: Ease of keeping up with mortgage repayments
How easy it is to keep up with payments
1%
1% 2% 10% 86%
Don't know
Paid in part by DWP
Sometimes fall behind
Constant struggle
Struggle from time to time
No difficulties
How easy it would be to keep up if your repayments increased (NB: represents 1% increase in mortgage rates)
1% 3% 1% 7%
22%
66%
Don't know Would fall behind with mortgage and other commitments Would fall behind with other commitments Would struggle with mortgage and other commitments Would struggle with other commitments No difficulties
Base: All respondents (857)
Most borrowers (86%) felt they currently had no difficulties in keeping up with their mortgage payments, although it should be noted that borrowers had only bought their mortgages within the last nine months so it may have been too early for them to assess this fully.
13
Borrowers with higher incomes and lower LTV ratios were more likely to say they had no difficulties in keeping up with payments. The majority (94%) of those with an income of over £100,000, and 92% of those with an LTV ratio of under 50%, stated that they had no difficulties. One in ten (10%) felt they struggled from time to time with payments and only a minority (3%) said they were constantly struggling. These figures are broadly in line with those seen in the Financial Capability Baseline survey6 where 83% stated no difficulties, 12% said they struggled from time to time and 5% said they struggled constantly or were falling behind with payments. It should be noted that the Financial Capability survey covered all types of mortgage, not just interest-only mortgages. Borrowers were also asked how easy they believed it would be to keep up with their payments if their mortgage payments were to increase by what would broadly equate to a 1% increase in interest rates.7 Two-thirds (66%) of borrowers did not think an increase in monthly payments of this nature would cause them any difficulties. Older borrowers were the most likely to think they would have no difficulties (75%), reflecting that they were most likely to have the smallest loans. However, if payments were to increase, only half of borrowers (52%) from social grades C2DE felt they would have no difficulties (reflecting the fact that their incomes are likely to be lower). Just over a fifth (22%) of borrowers felt that they would struggle with other commitments if their repayments were to increase, and around one in fourteen (7%) felt they would struggle both with their mortgage and other commitments. Only 2% felt they would actually fall behind with any payments.
6
FSA – Consumer Research 47a – Financial Capability baseline survey. It was calculated by the FSA that a 1% increase in interest rates would roughly equate to a 17% increase in monthly repayments. During the interview the software used calculated the value of a 17% increase based on what the respondent had said their monthly repayments were.
7
14
5.
Repayment vehicle
This chapter examines the proportion of borrowers who had a repayment vehicle8 and, where they did, the type of repayment vehicle they held. It also examines the proportion of borrowers with other savings and investment plans to pay back the loan (and what these plans were), the proportion with a vague idea of how they will pay back the loan, and the proportion with no idea of how they will pay back the loan. The questionnaire was developed with the aim of categorising borrowers into four distinct groups based on their plans for paying back the loan.9 These groups were defined as follows. • • • • Group 1 - have a recognised repayment vehicle in place (ISA, endowment or pension fund). Group 2 - have no repayment vehicle in place but have other savings/investment plans in place. Group 3 - have no repayment vehicle in place but have a rough idea of how they may repay the loan. Group 4 - have no repayment vehicle in place and have no idea of how they will repay the loan.
Chart 5.1 shows the proportion of all borrowers surveyed who were categorised into each of the four groups. Chart 5.1: Proportion of borrowers in each of the four groups
Group 4 Group 3 No repayment vehicle in place – have a rough idea of how will pay back No repayment vehicle in place – no idea of how will pay back
8%
5%
22%
Group 1 Have a repayment vehicle in place (ISA, Endowment or Pension)
65%
Group 2 Have no ISA, Endowment or Pension in place but have other savings /deposits and investments or plans and strategies on how will pay back
Base: All respondents (857)
8
Repayment vehicle as defined by the industry includes an ISA, endowment or pension fund. A full version of the questionnaire used can be found in the appendix.
9
15
It is groups 3 and 4 who are potentially most at risk in terms of not fully understanding the consequences of having bought an interest-only mortgage. Although all borrowers included in the survey had no repayment vehicle recorded on the PSD return, 22% did claim to have a repayment vehicle when questioned (group 1). The largest proportion (65%) of borrowers fell into group 2; those that had no repayment vehicle in place but claimed that they had other plans and strategies to pay back their mortgage. A significant minority (13%) of borrowers fell into groups 3 and 4; those that only had a rough idea of how they will back the loan (8%) or they had no idea at all how they will pay back the loan (5%). This equates to approximately 13,000 borrowers in the last quarter10 or around 50,000 borrowers in the last year that could potentially fall into the ‘at risk’ category of not fully understanding the consequences of taking out an interest-only mortgage. This group also includes a significant proportion of first-time buyers, around 1,500 in the last quarter or around 6,000 in the last year. The remainder of this chapter examines each group in more detail, looking specifically at the demographic make-up of the group and what strategies they have in place or are planning to use to pay off the loan. For analysis purposes groups 3 and 4 are examined together.11
5.1. Group 1
There were significant differences in the demographics of borrowers within each group. The 22% who stated they had a repayment vehicle in place (group 1) were more likely to: • • • • • • • be married; be social grade ABC1; have joint ownership of the mortgaged property; have bought their property directly; have rated their own financial knowledge as very good; be able to keep up with their mortgage payments; and have a lower LTV value (under 50%).
These comparisons are shown in more detail in Table 5.1. All significant differences with group 1 are marked with an asterisk.
10
The PSD returns for the last quarter (Q4, 2005) showed that about 100,300 mortgages had been sold where no repayment vehicle had been specified. Groups 3 and 4 combined have an unweighted base size of 118. The base sizes of each group are too small to analyse separately (74 in group 3 and 44 in group 4).
11
16
Table 5.1: Comparisons between groups 1, 2 and 3/4 combined Characteristic All % Base: unweighted Base: weighted Married ABC1 Joint ownership Bought direct Very good financial knowledge No difficulty in keeping up with payments LTV ratio under 50% 857 857 53 69 54 30 24 86 27 Group 1 % 183 189 62 76 64 39 32 90 40 Group 2 % 556 555 53* 69 51* 30* 24* 88 24* Group 3/4 % 118 113 40* 55* 48* 15* 11* 73* 20*
Chart 5.2 shows the different type of repayment vehicles that borrowers from group 1 had in place. The top three bars show the main repayment vehicles (as recognised by the industry) which defined borrowers in group 1. It was possible for borrowers to have other investments in place alongside their main repayment vehicle(s) and these are represented by the bars under the red line. Chart 5.2: Group 1 – repayment vehicle(s) in place
Endowment policy
51%
ISAs
47%
Pension fund
16%
Savings/deposit accounts
17%
Other properties
8%
Stocks and shares
7%
Premium bonds
2%
Investments in own business
1%
Other
8%
Base: All group 1 (unweighted 183, weighted 189)
17
Borrowers were split fairly evenly between those that had an endowment policy (51%) and those that had an ISA (47%). One in six had a pension fund (16%). There was some overlap; 14% of group 1 borrowers had more than one main repayment vehicle (usually an ISA alongside either an endowment policy or pension fund). A third (35%) of group 1 borrowers also had another type of investment in place alongside their repayment vehicle, most commonly savings and deposit accounts (17%). Base sizes are too small (under 100) to run statistical comparisons by sub-groups, but looking at the data qualitatively12 it suggests that older borrowers were more likely to have other savings and investments in place alongside their repayment vehicle (most commonly an endowment policy). All borrowers in group 1 were asked when they believed they will have paid off their mortgage in full. A wide range of answers was given; one in eight (13%) believed they would be able to pay off their mortgage within the next five years while one in seven (15%) felt it would be more than 20 years before they could pay it off. A minority (1%) stated that the time taken to pay off the loan would depend on the performance of their investments and 5% admitted that they did not know when they would be able to pay off their loan.
5.2. Group 2
Two-thirds (65%) of borrowers stated that they had no repayment vehicle in place but did have other investments, plans and strategies in place to pay back the loan. They were more likely to: • • • • be single; be social grade ABC1; have single ownership of the mortgage; and have reasonable financial knowledge.
These comparisons are shown in more detail in Table 5.2. All significant differences with group 2 are marked with an asterisk.
12
These findings are indicative only, as they are based on small samples.
18
Table 5.2: Comparisons between groups 1, 2 and 3/4 combined Characteristic All % Base: unweighted Base: weighted Single ABC1 Single ownership Reasonable financial knowledge 857 857 28 69 46 59 Group 1 % 183 189 21* 76 36* 61 Group 2 % 556 555 30 69 49 61 Group 3/4 % 118 113 32 55* 52 51*
All borrowers in group 2 were asked what other investments they had or what plans they had in place to pay back the loan. The main responses are shown in Chart 5.3. Chart 5.3: Group 2 - other investments, plans and strategies in place
Sale of mortgaged property Sale of another property
24% 19% 16% 13% 8% 3% 3% 2% 2% 1% 16%
Switch to repayment later
Savings account Stocks/shares/unit trusts and other investments Inheritance
W ill trade down Overpayment / make lump sum payments Life insurance
Sell/invest in business
Other
Base: All group 2 (unweighted 556, weighted 555)
Over two-fifths (44%) of all group 2 borrowers planned to use monies from property sale13 and 22% planned to use some form of investment.14 More specifically, a quarter (24%) planned to use the proceeds of the mortgaged property whilst one in five (19%) planned to use the sale of another property. A minority (3%) mentioned plans to trade down to a smaller property.
13
Any property sale including both the mortgaged property or any other properties. Any investment includes, stocks and shares, unit trusts, or any other saving/deposit account.
14
19
Around one in nine (11%) borrowers of those planning on using the sale of the mortgaged property had a LTV ratio of 90% or over. These borrowers can be described as an ‘at risk’ group given that they are relying on a significant increase in property values and the sale of the property to pay back all the money borrowed. The third most common way group 2 borrowers planned to pay the loan back was by switching to a repayment mortgage at a later date, with one in six (16%) planning to do this. The majority (86%) of group 2 borrowers who planned to switch to a repayment mortgage expected to do this within the next two to three years, and most (80%) stated the reason they will be able to make this switch is because they will be earning more. The remainder simply felt they would switch when they could afford to do so. Plans and strategies for paying back the loan differed by the age and type of borrower as shown in Table 5.3. Table 5.3: Other investments and plans in place by age and type of borrower Age Under 35 % 148 156 19 12 26 16 5 2 1 3 3 1 31 22 18 3544 % 175 154 19 15 23 12 8 3 3 3 1 2 36 21 16 4554 % 145 129 23 30 8 8 11 2 5 1 2 2 55 20 17 55+ % 88* 115 37 20 3 14 10 4 6 1 1 59 25 11 First time % 60* 72 8 10 29 31 6 3 1 1 18 40 18 Borrower type Home mover % 144 156 24 21 15 11 6 4 3 2 2 2 47 19 15 Remortgage % 340 294 27 21 14 8 9 2 4 1 1 1 50 18 14
All group 2 % Base: unweighted group 2 Base: weighted group 2 Proceeds of sale of mortgaged property Sale of another property Switch to repayment later Savings accounts Stocks, shares, unit trusts and other investments Inheritance Will trade down Overpayment/will make lump sum payments Life insurance Sell/invest in business ANY FUTURE PROPERTY SALE ANY FUTURE INVESTMENT Other 556 556 24 19 16 13 8 3 3 2 2 1 44 22 16
*NB: small base size, indicative only 20
The oldest borrowers (over 55) were the most likely to be planning on using the sale of the mortgaged property to pay off their loan (37% compared with 19% of those under the age of 45). They were also more likely to use the sale of another property or trade down; three-fifths of those aged over 55 (59%) planned to use the future sale of any property (including the mortgaged property). Borrowers between 45 and 54 were the most likely to be planning on using the sale of another property (30% compared with 20% of those aged over 55), but almost a quarter (23%) of this age group were planning to use the proceeds of the mortgaged property. A quarter (26%) of younger borrowers (under 35) were planning on switching to a repayment mortgage and, as discussed earlier, the majority of these planned to do so with next few years when they are earning more money. Although the base size is small and should be treated with caution, three in ten first-time buyers planned to switch to a repayment mortgage. This is linked to the fact that most first-time buyers are younger and therefore more likely to choose an interest-only mortgage because it enables them to get on the property ladder sooner, their plan being to switch to a repayment mortgage once they can afford to do so. Reasons for choosing an interest-only mortgage are discussed in more detail in the next chapter.
5.3. Groups 3 and 4 combined
The final section of this chapter looks at borrowers who fell into groups 3 and 4 (those who can be described as most at risk because they have no definite plans on how they will pay back the money they have borrowed). The 13% in groups 3 and 4 were more likely to: • • • • • • • • be cohabiting; be social grades C2DE; have single ownership; be financially unaware; use an intermediary; have a mortgage term of over 20 years; struggle with their mortgage repayments from time to time; and be first-time buyers;
These comparisons are shown in more detail in Table 5.4. All significant differences with group 3/4 are marked with an asterisk. 21
Table 5.4: Comparisons between groups 1, 2 and 3/4 combined Characteristic All % Base: unweighted Base: weighted Cohabiting C2DE Single ownership Leave finance to experts Use an intermediary Term of over 20 years Struggle with payments from time to time Are first-time buyers 857 857 15 24 46 17 70 49 10 12 Group 1 % 183 189 11* 18* 36* 7* 61* 44* 8* 5* Group 2 % 556 555 19 25* 39* 15* 70* 51 9* 13 Group 3/4 % 118 113 22 33 52 39 85 56 21 19
All borrowers in group 3 (who had a vague idea of how they might pay back their loan) were asked how they thought they would eventually pay off their loan. This is summarised in Chart 5.4. Chart 5.4: Group 3/4 combined - vague ideas and plans for paying off loan
Switch to repayment later Proceeds of sale of mortgaged property Through increased salary Put money in savings/deposit account Use expected inheritance 9%
30% 17%
6% 6%
Sale of another property Take out/invest in endowment policy Use existing savings/investments Use future bonuses Will trade down (smaller property) Will buy another property
5%
4% 4%
3%
2% 2%
Other
14%
Base: All group 3 (unweighted 74, weighted 71)
22
Three in ten borrowers (30%) from group 3 felt that they would probably switch to a repayment mortgage later on. Overall a quarter thought they would use the sale of property, including 17% who thought they would use the sale of the mortgaged property. Of the borrowers who planned to use the sale of their property, around one in six (16%) had a LTV ratio of 90% or over. Throughout the remainder of this report, comparisons of borrowers will be made between groups 1, 2 and 3/4 combined alongside other key demographics.
23
6.
Understanding of mortgages
Having looked at the plans and strategies borrowers had in place for paying off their mortgage, this chapter examines how well borrowers understood interest-only mortgages. It also focuses on the reasons why they chose an interest-only mortgage and what they perceived to be the main benefits and drawbacks.
6.1. Understanding of interest-only mortgages
All borrowers were spontaneously asked at the beginning of the interview which of the following three statements best described an interest-only mortgage. • • • Your monthly payment includes a repayment for the interest and also a repayment for the amount you borrowed. Your monthly repayment mainly covers the interest on the mortgage loan, but includes just a small payment to repay the money borrowed; Your monthly repayment to the mortgage lender is only the interest on the money borrowed.
Whilst the first statement is definitely incorrect and the third is definitely correct, the middle statement is applicable to borrowers who had bought a part interest-only mortgage (and therefore would make a small repayment on the loan each month) but not applicable to those who had a full interest-only mortgage. All answers were therefore classified as either correct or incorrect based on this rationale.15 Table 6.1 shows the proportion that understood correctly what an interest-only mortgage was and the proportion that misunderstood, both at an overall level and by financial awareness and borrower group. Table 6.1: Understanding of interest-only mortgage by financial knowledge and borrower group Financial understanding All % Base: unweighted Base: weighted Correct Incorrect Don’t know 857 857 92 8 1 Very good % 189 205 90 9 2 Reasonable % 507 509 94 5 1 Leave to experts % 161 143 83 14 4 Borrower group 1 % 183 189 95 4 1 2 % 556 555 93 6 1 3/4 % 118 113 75 20 4
15
If a borrower mentioned statement two and had a part interest-only mortgage their answer was classified as correct. If they mentioned statement two and had a full interest-only mortgage their answer was classified as incorrect.
24
Understanding of interest-only mortgages was high; the majority of borrowers (92%) fully understood what was meant by an interest-only mortgage. Only a minority (8%) believed they were paying some of the money borrowed back when they were not, and only 1% admitted they were not sure which of the statements best described an interest-only mortgage. However, only threequarters (75%) of borrowers in group 3/4 understood what is meant by an interest-only mortgage and a fifth (20%) were incorrect in their understanding with the remainder admitting they were not sure. As described earlier, group 3/4 borrowers were more likely to admit they had less financial understanding, so therefore it is of no surprise that those who preferred to leave finance to the experts were less likely to be correct in their understanding of interest-only mortgages (83% compared with 92%). All borrowers with the higher loan values (over £300k) understood what is meant by an interest-only mortgage.
6.2. Reasons for choosing an interest-only mortgage
As well as probing to uncover how well borrowers understood interest-only mortgages, all borrowers were asked why they chose this type of mortgage and what they perceived to be the benefits and drawbacks of an interest-only mortgage. Chart 6.1 shows the main reasons for choosing an interest-only mortgage revolved around price and affordability. Over half (51%) of borrowers spontaneously said they chose the mortgage because the monthly repayment was lower, and one in five (19%) said they chose it because it was the only one that they could afford. Chart 6.1: Reasons for choosing an interest-only mortgage (spontaneous)
Monthly repayment lower Only one could afford Adviser recommended More time to save/raise funds Simpler Easier to get from lenders Flexibility/control of payments Short-term measure To get on property ladder Other Don't know
51% 19% 8% 6% 4% 4% 3% 2% 2% 15% 1%
Base: All respondents (857) 25
Only 8% spontaneously mentioned that they chose an interest-only mortgage because their adviser recommended it. This is a topic which is covered in more detail in the next chapter. Table 6.2 shows that there were differences between borrowers in terms of the type of borrower they were. Table 6.2: Reasons for choosing an interest-only mortgage (spontaneous) Group All % Base: unweighted Base: weighted Monthly payment is lower Only one could afford Adviser recommended it More time to save/raise funds Simpler Easier to get from lenders Flexibility Short term measure To get on property ladder Other *NB: small base size, indicative only Borrowers in group 3/4 were significantly more likely to have chosen their mortgage because their adviser recommended it (19%). This is not surprising given that these borrowers were more likely to admit that they preferred to leave finance to the experts. A third of first-time buyers (33%) chose an interest-only mortgage because it was the only one that they could afford. As highlighted in the previous chapter, many first-time buyers chose an interestonly mortgage to get on to the property ladder sooner and did this with the intention of switching to a repayment mortgage once they could afford it (i.e. when they are earning more). Borrowers who felt they had very good financial knowledge were the most likely to mention the lower monthly repayment (64% compared with 51% overall). 857 857 51 19 8 6 4 4 3 2 2 15 1 % 183 189 42 15 8 10 1 4 5 1 1 18 2 % 556 555 58 19 6 5 4 3 3 3 2 11 3/4 % 118 113 34 25 19 3 4 4 1 1 2 10 First time % 86* 103 53 33 8 1 6 3 1 3 4 7 Borrower type Home mover % 229 249 51 17 5 11 6 3 4 2 17 Remortgage % 520 446 52 16 9 4 2 3 3 2 15
26
6.3. Benefits of an interest-only mortgage
Linked to the fact that most borrowers chose an interest-only mortgage because the monthly repayment was lower, the majority of borrowers (67%) also felt the main benefit of an interest-only mortgage was the lower monthly repayment. This is shown in chart 6.2. Chart 6.2: Benefits of an interest-only mortgage (spontaneous)
Monthly repayment is lower More time to save/raise funds
67%
5%
Easier to get from lenders
4%
Can pay off chunks of capital Can use other investments It’s an investment (value will increase)
3%
2%
2%
Simpler
2%
There are none
12%
Other
10%
Don’t know
4%
Base: All respondents (857)
Very few other benefits were mentioned, indeed one in eight borrowers (12%) did not feel there were any specific benefits of an interest-only mortgage. Table 6.3 shows that borrowers who preferred to leave finance to the experts were the most likely to claim there were no benefits of an interest-only mortgage (23%), while those who claimed to have very good financial knowledge were more likely to mention the lower monthly repayment (77%). As highlighted earlier, financial sophistication and borrower group are closely aligned and therefore it is of no surprise that the proportion of borrowers in group 3/4 stating there were no benefits was also slightly (although not significantly) higher (14%). Borrowers in group 3/4 were, however, more likely to mention that interest-only mortgages are easier to get from lenders (13% compared with 4% overall). 27
Table 6.3: Benefits an interest-only mortgage (spontaneous) Group All % Base: unweighted Base: weighted Monthly payment is lower More time to save/raise funds Easier to get from lenders Flexibility Can pay off chunks of capital Can use other investments Simpler No real benefits Other Don’t know 857 857 67 5 4 3 3 2 2 12 10 4 1 % 183 189 68 9 2 4 2 6 3 12 11 2 2 % 556 555 69 5 4 3 3 1 2 12 10 4 3/4 % 118 113 58 3 13 1 3 3 1 14 11 6 Financial understanding Very good % 189 205 77 4 4 8 2 3 1 4 12 2 Reasonable % 507 509 67 7 5 2 3 2 1 13 11 4 Leave to expert % 161 143 54 3 3 3 3 2 23 9 8
6.4. Drawbacks of an interest-only mortgage
All borrowers were also asked what they felt the main drawbacks of an interest-only mortgage were. Around three-quarters of all borrowers (76%) spontaneously mentioned the problem if the capital borrowed is not paid back. Chart 6.3: Drawbacks of an interest-only mortgage (spontaneous)
Do not pay back money borrowed
58%
Risk may not be able to pay all back
18%
•76% mention problem of paying capital back
More expensive in long term
9%
Need to set up separate savings
4%
Could lose house if don't repay in full
3%
Not owning property at end of term
2%
There are none
9%
Other
7%
DK
2%
Base: All respondents (857)
28
More specifically, three in ten borrowers (58%) mentioned the fact that none of the money borrowed is paid back, and just under a fifth (18%) stated one of the drawbacks is the risk that they may not be able to pay back the full amount borrowed. One in eleven (9%) borrowers felt that interest-only mortgages work out more expensive in the long term and one in eleven borrowers (9%) stated that they did not think there were any disadvantages of an interest-only mortgage. Table 6.4 shows these were more likely to be older borrowers. Table 6.4: Drawbacks of an interest-only mortgage (spontaneous) Group All % Base: unweighted Base: weighted Do not pay any of the money borrowed back Risk that may not be able to pay all back More expensive in long term Need to set up separate savings Could lose house if don’t repay in full Now owning property at end of term There are none Other Don’t know 857 857 58 18 9 4 3 2 9 7 2 1 % 183 189 58 34 5 4 4 5 7 2 % 556 555 60 14 10 4 4 2 10 6 2 3/4 % 118 113 53 14 12 1 4 9 5 6 Under 35 % 225 231 69 15 12 3 3 3 6 8 2 298 274 53 19 9 4 4 4 7 8 3 Age 3544 4554 % 208 189 62 17 5 6 4 4 8 4 1 55+ % 126 163 38 23 10 2 3 3 18 9 1
The reason older borrowers were less likely to mention drawbacks is probably due to the fact that they were more likely to be re-mortgaging for smaller values; a less risky purchase when compared with younger first-time buyers. Indeed, first-time buyers and therefore those aged under 35 were the most likely to feel that paying none of the money back was the main drawback of an interestonly mortgage (69% and 66% respectively). Borrowers who felt finance is best left to the experts were the least likely to mention the risk that they may not be able to pay it all back (9%). As highlighted earlier in this chapter, borrowers who prefer to leave finance to the experts are less likely to fully understand what is meant by an interest-only mortgage, and it would seem they are therefore less likely to fully understand the risks and drawbacks that come with this type of mortgage. 29
Given borrower type and financial sophistication are so closely linked it is therefore of no surprise that the proportion in borrower group 3/4 who mentioned the risk that they may not be able to pay the capital back was also lower (14%).
6.5. Awareness of risks associated with interest-only mortgages and repayment plans
Following on from these spontaneous questions about benefits and drawbacks borrowers were also asked about their awareness of specific risks related to interest-only mortgages. These included: • • • • awareness of the lender having the right to sell the house; awareness of risks relating to reliance of investments and savings; awareness of risks relating to reliance on future bonuses; and awareness of risks relating to the sale of the property.
6.6. Awareness of the lender having the right to sell the house
Table 6.5 shows the majority of borrowers (84%) were fully aware that the lender has the right to sell the house if borrowers do not repay the loan in full by the end of the term. That said, a significant proportion of borrowers (9%) claimed not to be aware of this at all. Table 6.5: Awareness of lender having the right to sell the house Financial understanding All % Base: unweighted Base: weighted Fully aware Not sure Not aware at all 857 857 84 7 9 Very good % 189 205 94 2 4 Reasonable % 507 509 83 7 9 Leave to experts % 161 143 71 12 17 Borrower group 1 % 183 189 82 7 11 2 % 556 555 87 6 7 3/4 % 118 113 69 12 19
Again, this differs significantly by borrower group and therefore by financial understanding. A third (31%) of borrowers from group 3/4 were not sure or not aware of the lender having the right to sell the house compared with 18% from group 1 and 13% from group 2. Equally, 29% of those who prefer to leave finance to the experts were not fully aware of this risk compared with 6% of those with a very good financial understanding and 16% overall.
30
Borrowers aged over 55 (93%) and those with a household income of over £100,000 (92%) were also more likely to be aware of a lender’s right to sell the property, although this is undoubtedly linked to the correlation between borrower group and demographics (i.e. group 1 and 2 are more likely to be financially aware, social grade ABC1 and have a higher income).
6.7. Awareness of risks relating to reliance of investments/savings
As discussed in the previous chapter, in total just under half of all borrowers (48%) plan to invest (or have already invested) monies in order to pay off their loan.16 Due to the way the borrower groups were determined (see previous chapter), nearly all borrowers (98%) who planned to use or were using investments were either in borrower group 1 or 2. These borrowers were asked how aware they were of the need to keep tracking and monitoring the progress of these investments and how big a risk they felt there was that the investments might not pay off the loan. Chart 6.4 shows that nearly all borrowers (92%) claimed that they were fully aware that they have to monitor their investments and seven in ten (70%) were certain or confident that their investment would pay off the loan in full. Although the base size is low (60 respondents) and should be treated with caution, borrowers who preferred to leave finance to the experts were the most likely not to be aware that investments should be tracked and monitored (20% compared with 5% overall). Those with a very good knowledge of finance were the most likely to be certain their investments would pay off their loan (42%) as were older borrowers (55%), compared with 30% overall. Given that it is impossible to be certain of how an investment may perform it could be argued these borrowers are over confident about their investment and are therefore at risk.
16
Any investment/saving includes, ISA, endowment, stocks and shares, pension fund or any other saving or deposit account.
31
Chart 6.4: Awareness of risks relating to reliance on investments and savings
•4 8 % h a ve in ve s tm e n ts o r p la n to u s e in ve s tm e n ts to p a y o ff th e lo a n
A w a re n e s s o f the n e e d to k e e p c o ntrib utin g a n d m o nito rin g in ve stm e n ts
2%
1% 5%
92%
D o n 't k n o w
N o t a w a re a t a ll
N o t s u re
F u lly a w a re
P e rc eive d ris k th at in ve stm e nts m a y n ot p a y o ff the loa n
3%
7%
19%
40%
30%
D on't k now
S ignific ant ris k m ay not pay off
S om e ris k m ay not pay off
C onfident w ill pay off
Cert ain will pay off
B a s e : A ll in ve s te d o r p la n n in g to in v e st (u n w e ig h te d 4 2 9 , w e ig h te d 4 1 2 )
6.8. Awareness of risks relating to reliance on future bonuses
In total, one in six borrowers (16%) stated that they are relying on future inheritance or wage increases/bonuses to pay off their loan. These borrowers were asked how aware they were that relying on these situations may mean they will not have enough to pay off the loan at the end of the term. Chart 6.5 shows the majority (87%) claimed that they were fully aware of the risks, 8% said they were not sure and a minority (2%) admitted they were not aware at all. Although the base size of 28 is very small and so findings should be treated as indicative, the data indicated that those in group 3/4 may be less aware of the risks of this strategy.
32
Chart 6.5: Awareness of risks relating to reliance on inheritance and future wages/bonuses
• 1 6 % w ill u s e fu t u r e b o n u s e s o r in h e r ita n c e to p a y o f f lo a n
A w a r e n e s s th a t r e ly in g o n fu tu r e b o n u s e s /in h e r ita n c e o r o th e r m o n ie s m a y n o t b e e n o u g h to p a y o ff lo a n
4% 2% 8%
87%
D o n 't k n o w
N o t a w a re a t a l l
N o t s u re
F u l ly a w a re
B a s e : A ll p la n n in g to u s e f u tu r e b o n u s e s / in h e r it a n c e / o t h e r m o n ie s ( u n w e ig h t e d 1 5 2 , w e ig h t e d 1 4 1 )
6.9. Awareness of risks relating to the sale of the property
The final section of this chapter looks at the fifth (21%) of borrowers who planned on using the sale of the property to pay of their loan. Of these borrowers, two-fifths (41%) felt that there were no risks involved in such a strategy. Those who felt there to be no risks involved were more likely to be older (64% over 55 compared with 15% under 35) and have a shorter term on their loan (51% under 20 years compared with 26% 21-25 years). One in eight borrowers (12%) who felt there are no risks involved with the future sale of property had a LTV ratio of over 90%. However, this should be kept in perspective as, due to the small bases, this sub-group is only made up of nine borrowers from the 857 surveyed. The main risk, mentioned by a quarter (26%), was negative equity and the concern that house prices may decline in the future. Other risks mentioned included not having enough money to buy another house (8%), value of mortgaged property may not grow at same speed as property they want to trade down to (7%), the risk that they may have to sell the property and move out (6%), and the risk that it may not be possible to sell the property at all (2%). Thus in conclusion, these results suggest that most purchasers of interest-only mortgages have a reasonable understanding of the product they have bought and recognised the risks they faced. However, there is a small pocket of investors that are less aware. These are more likely to be those who are in groups 3 and 4 and therefore at potentially greatest risk as they do not have a planned strategy for repaying the capital and tend to be less financially sophisticated and more reliant on their adviser. 33
7.
The decision-making process
This chapter examines how borrowers went about choosing their mortgage and what role professional advice played in this decision. It should be noted that this was the borrower’s own perception of whether they received advice; it therefore does not necessarily reflect the service the firm actually gave and whether this included mortgage advice as defined by the Regulated Activities Order. Where borrowers claimed they were given professional advice, the type of advice borrowers recalled receiving and what they remembered being discussed is explored in more detail. It should also be noted that as borrowers purchased their mortgage up to nine months ago, recall of the discussions may be affected to some extent by this passage of time.
7.1. How borrowers chose their mortgage and whether advice was given
Chart 7.1 shows that the majority of borrowers (84%) claimed they were given advice during the course of choosing their mortgage. Chart 7.1: Whether advice given and how chose mortgage
A d v ic e g iv e n ?
H o w c h o s e m o rtg a g e
16%
37%
31%
84%
6%
25%
Yes No
R e c o m m e n d e d b y p ro fe s s io n a l In flue n c e d b y p ro fe s s io na l In flue n c e d b y s o m e o n e e ls e M y c hoic e entire ly
B a s e : A ll re s p o n d e n ts (8 5 7 )
34
As would be expected, borrowers who bought their mortgage direct from the lender were the most likely to have received no advice (30% compared with 16% overall). However, 70% of borrowers whom the PSD returns show bought direct claimed they received advice. The chart also shows how borrowers made their decision. A third (31%) chose an interest-only mortgage because they were recommended by an adviser and a quarter (25%) said they were influenced by a professional adviser. A minority (6%) claimed they had been influenced by someone else (such as a family member) and the remainder (37%) claimed they had made their mind up on their own. Table 7.1 shows there were significant differences by the level of financial understanding and channel used. Table 7.1: How chose mortgage Financial understanding All % Base: All received advice unweighted Base: All received advice weighted I chose one recommend by a professional adviser I was influenced in my final choice by a professional adviser I was influenced in my final choice by someone else I made the choice entirely by myself 752 727 31 25 6 37 Very good % 141 141 24 13 3 60 Reasonable % 469 459 31 30 5 34 Leave to experts % 142 126 45 25 12 17 Direct % 91 182 20 19 7 54 Channel Intermediary % 661 545 36 28 5 30
Borrowers who felt they had a very good financial understanding were the most likely to have said they made the decision about which mortgage to buy entirely on their own (60% compared with 37% overall), as were borrowers who bought their mortgage directly from the lender (50%). Borrowers who preferred to leave finance to the experts were more likely to have been recommend their mortgage by a professional adviser (45% compared with 31% overall), as were those who bought their mortgage through an intermediary (36%).
35
7.2. How advice given and what was discussed
All borrowers who received advice were asked how they knew that they had received advice. Chart 7.2 shows seven in ten borrowers (70%) asked to receive advice on what would be the most suitable mortgage for them. Just under three-fifths (57%) recalled the adviser confirming verbally that they were receiving advice and just over half (53%) recalled paperwork with the loan that confirmed advice had been given. Two-fifths (43%) of borrowers remembered receiving a letter explaining why the mortgage had been recommended for them. Chart 7.2: How advice was confirmed
I (we) asked to receive advice on what would be the most suitable mortgage for me
70%
The professional adviser confirmed verbally that I was receiving advice
57%
The paperwork provided with the loan confirmed that advice would be given
53%
I received a letter explaining why the mortgage was being recommended for me.
43%
Base: All who received advice (unweighted 752, weighted 727)
Table 7.2. shows that recall of how the advice was confirmed was much lower among borrowers from group 3/4. Whilst borrowers from group 3/4 were more likely to have asked for advice on what was more suitable for them (77% compared with 70% overall) they were significantly less likely to recall the verbal confirmation that advice had been given (48%), seeing paperwork confirming advice would be given (35%), and receiving a letter explaining why the mortgage was being recommended (30%).
36
Table 7.2: How advice was confirmed Borrower group 1 % 149 144 70 23 59 51 2 % 502 485 68 59 56 43 3/4 % 101 98 77 48 35 30
All % Base: All received advice - unweighted Base: All received advice - weighted I (we) asked to receive advice on what would be the most suitable mortgage for me The professional adviser confirmed verbally that I was receiving advice The paperwork provided with the loan confirmed that advice would be given I received a letter explaining why the mortgage was being recommend for me 752 727 70 57 53 43
Borrowers who received advice were also asked if they could recall what was discussed. Given the time that had elapsed since the purchase they were prompted with a list of the areas that would be likely to be covered in the advice process. All borrowers who received advice recalled discussing at least one of the issues shown in Chart 7.3, and over half (54%) discussed all the issues. Chart 7.3: Issues discussed during advice
Your employment or job status
91%
Your existing outgoings and financial commitments
90%
How affordable an interestonly mortgage might be
88%
If you had a preference for Interest-only or repayment mortgage
87%
Any special features of the mortgage (e.g. early repayment charge)
83%
Why an interest-only mortgage was more suitable for you
81%
How you would repay the capital on the mortgage
80%
Base: All who received advice (unweighted 752, weighted 727)
37
Again there were significant differences by group and this is shown in Table 7.3. Those in group 3/4 were significantly less likely to recall discussing whether there was a preference for an interest-only mortgage (78% compared with 87% overall), whether there were any special features of the mortgage (74% compared with 83% overall) and, most notably, how the capital would be repaid (68% compared with 80% overall). Table 7.3: Issues discussed during advice Borrower group 1 % 149 144 87 91 85 88 88 76 88 2 % 502 485 91 90 91 88 83 83 79 3/4 % 101 98 94 88 82 78 74 77 68
All % Base: All received advice - unweighted Base: All received advice - weighted Your employment or job status Your existing outgoings and financial commitments How affordable an interest-only mortgage might be If you had a preference for interest-only or repayment mortgage Any special features of the mortgage Why an interest-only mortgage was more suitable for you How you would repay the capital on the mortgage 752 727 91 90 88 87 83 81 80
Although borrowers in group 3/4 were more likely to admit they asked for advice on their mortgage (this group of borrowers openly admit finance is best left to the experts) their recall of specific issues relating to the mortgage being discussed was much lower. This perhaps explains why borrowers in group 3/4 did not have as good an understanding about interest-only mortgages and, in particular, were less likely to have made any specific plans for repaying the capital. Borrowers were also asked directly if they recalled any disadvantages of an interest-only mortgage being pointed out to them (regardless of who pointed this out). Chart 7.4 shows four in five (79%) borrowers spontaneously recalled having some disadvantages pointed out to them. Those that did not recall discussing any disadvantages were more likely to be those who were less financially sophisticated (37% compared with 21% overall).
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Chart 7.4: Disadvantages pointed out (spontaneous recall)
Risk won't pay back Made aware not paying loan back Risk of losing home
35% 15% 11% 6% 5% 3% 3% 2% 8% 21% 9%
Could be expensive Investments may not perform Circumstances might change Only paying interest Penalities for switching to repayment Other
No disavantages discussed
DK
Base: All respondents (857)
The disadvantage which borrowers were most likely to recall discussing was the risk that they may not be able to pay all the money borrowed back (35%). A further 15% said they were made aware that they were not paying back the loan and 11% that there was a risk of them losing their home if they could not repay the capital when it was due. Of those who had disadvantages pointed out to them, 58% had it explained by a lender/intermediary (most likely to be first-time buyers) and 46% claimed they were already aware (most likely to be those with good financial knowledge). Only a minority mentioned paperwork that came with the mortgage (7%) and FSA consumer factsheets (2%). Chart 7.5 shows the proportion of borrowers who considered a repayment mortgage.
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Chart 7.5: Whether considered a repayment mortgage
33%
67%
Y e s N o
B a s e : A ll r e s p o n d e n ts ( 8 5 7 )
Two-thirds of borrowers (67%) did consider a repayment mortgage; these were more likely to be younger (77%) and first-time buyers (86%). As highlighted earlier in the report, younger, first-time buyers were more likely to have chosen an interest-only mortgage because it was the cheaper option and, as part of this decision-making process would have considered other types of mortgages.
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8.
Conclusion
There was a significant minority of borrowers who had no idea or definite plan on how they will pay back the capital they borrowed. The proportion falling into this category equates broadly to around 13,000 borrowers in the last quarter and around 50,000 borrowers in the last year.17 It also includes a significant proportion of first-time buyers, around 1,500 in the last quarter or around 6,000 in the last year. These borrowers tended to be respondents who admitted to leaving finance to the experts, and they took an interest-only mortgage because it was recommended to them by a professional. Despite receiving professional advice, these borrowers appeared to be of greatest concern as they tended to have a lower understanding of mortgages in general and the risks involved. In particular, they were more likely to be unaware of a lender’s right to sell the house (if they failed to repay the capital) and be less likely to recall discussing particular features of an interest-only mortgage (including how they will pay it back). The majority of borrowers who had an interest-only mortgage but no repayment plan marked on their PSD return did have either a recognised repayment plan or other investments/plans in place to pay the loan back. The plans and repayment vehicles in place by borrowers tended to vary depending on the age of borrower and the mortgage purpose or their status. Younger borrowers, and therefore first-time buyers, were more likely to be planning on using savings or planning to switch to a repayment mortgage when they could afford it (usually within the next two to three years). Older borrowers, and therefore re-mortgagers, were more likely to say that they would use a future property sale (either the mortgaged property or another property they own). In the majority of cases the LTV ratio was less than 50%, suggesting these borrowers are not at great risk. The small proportion planning to use future property sale of the mortgaged property with higher LTV ratios may give cause for concern.
17
Based on the finding that 13% of borrowers who had no repayment vehicle marked on their PSD return had no definite plans or ideas on how they would pay back their loan.
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9.
Appendix – technical report
9.1. Methodology
In total, 857 interviews were conducted by telephone with borrowers who had recently taken out an interest-only mortgage and the PSD returns showed no repayment vehicle had been recorded. Fieldwork was conducted between 4 and 26 September 2006 and the interview was 15 minutes long on average. The key challenge posed by this study was ensuring we surveyed a representative cross-section of borrowers in the target market (i.e. borrowers who had bought an interest-only mortgage where no payment vehicle was specified). The other key issue we needed to take into account in devising the sampling strategy was that the PSD returns do not contain customer contact details and these would, therefore, have to be obtained directly from the firms. The simplest approach would have been to select a cross-section randomly from all providers (i.e. selecting 1 in n borrowers). However, due to the nature of the market and the number of providers operating within it, this would have been a very time consuming (and expensive) approach. After discussions with the FSA it was agreed that for practical reasons and to minimise the burden on providers, the sample of borrowers should be selected from a limited number of firms. This necessitated a more complex, two-level sampling approach. The first level ensured an appropriate number and cross-section of providers was selected, and the second level ensured we selected a representative cross-section of borrowers from the providers selected. In selecting the providers during the first stage of the sampling process both the size (number of mortgages sold) and whether they were sold through intermediaries or not was taken into account. The PSD returns for the last year (April 2005 to March 2006) indicated that the sales of interest-only mortgages where the repayment vehicle is not known is heavily skewed towards a small number of major players. The data showed the top five providers accounted for 60% of all sales and the top 14 accounted for 80% of all sales. Through discussions with the FSA it was agreed that the best approach would be to sample four of the top five providers, three middle-sized18 providers and three of the smallest providers.
18
Middle-sized providers were defined as the sixth to the fourteenth provider in terms of number of mortgages sold.
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To allow for any firms that were unable to provide contact details within the required deadline, a number of reserves were also identified. Only one of the middle-sized providers was able to provide sample within the agreed timescale,19 therefore an extra ‘small’ provider was added to make up any shortfall of sample. The FSA and IFF Research double-checked that the nine providers chosen (and able to provide a sample) reflected a good mix of the mortgage-lending market (i.e. they represented a good mix by size and how mortgages are sold). The nine providers used to draw the sample were four of the top five providers, one middle-sized provider and four of the smallest providers. Once the providers were selected the next stage was to ensure a representative sample of borrowers was selected. This was done by ensuring the sample drawn from providers broadly matched the population of borrowers from the last quarter’s PSD returns by: • • • • age of borrower; size of loan; mortgage purpose; and channel (whether bought direct or through an intermediary).
The achieved sample was also weighted to represent the profile of borrowers in the last quarter’s PSD returns by the same four categories. (Further details of the weighting are provided in the weighting section.) Although all respondents were sampled directly from the PSD returns, screening questions were used to double check that all respondents had an interest-only mortgage. In total 2% were screened out because they did not have an interest-only mortgage or because they had a lifetime mortgage or commercial property (further details are provided in the response rate section).
9.2. Pilot
A short pilot (25 interviews) was conducted between 30 and 31 August to test the questionnaire and survey approach. It was found to work well and within the specified timeframe so no substantial changes were made before starting the main stage of fieldwork. All pilot interviews were included in the main dataset.
19
The agreed timetable of the survey only allowed a one month turnaround for the collection of sample.
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9.3. Sample profile and weighting
As discussed above, the sample was structured by age, channel, loan size and mortgage purpose. The achieved sample by each of these is shown in the middle column of Tables 9.1 through to 9.4. The data was also weighted to ensure it reflected the population of borrowers in the Quarter 4 PSD returns. Rim weights were applied by age, channel, loan size and mortgage purpose. The weighted profile by each of these is shown in the last column of the tables. Table 9.1: Sample and weighted profile by age of borrower Age Under 35 35-44 45-54 55+ Sample profile % 26 35 24 15 Weighted survey data % 27 32 22 19
Table 9.2: Sample and weighted profile by type of mortgage Type First-time buyer Home mover Re-mortgager Other Table 9.3: Sample and weighted profile by channel Channel Intermediary Direct Table 9.4: Sample and weighted profile by loan size Loan size Under £100k £110k-£149k £150k-£199k £200k-£299k £300k+ Sample profile % 30 30 20 13 7 Weighted survey data % 31 26 17 15 11 Sample profile % 85 15 Weighted survey data % 70 30 Sample profile % 10 27 61 3 Weighted survey data % 12 29 52 7
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9.4. Response rate
The following table shows the outcomes of sample used (i.e. called at least once) in the survey. The response rate out of those in scope of fieldwork was 41%. Table 9.5: Response rates Population of all sample provided Total amount of sample mailed out Opt-outs received No telephone number on sample Total unusable sample Total amount of sample available for study Mortgage paid off/do not have interest-only mortgage Lifetime mortgage Commercial property Total screen outs Total in scope for study Appointment made for interview with respondent, but not achieved during fieldwork period Respondent called several times, but unable to reach respondent Not available in fieldwork period Unobtainable number Total not in scope for study Total in scope for fieldwork Interviews achieved Refusals Response rate 5,700 465 420 885 4,815 47 22 37 106 4,709 412 723 348 1111 2594 2,115 857 1258 / 100% 8% 7% 16% 84% 1% *% 1% 2% 83% 7% 13% 6% 19% 46% 37% 15% 22% 15% Population in scope for study / / / / / / / / / 100% 9% 15% 7% 24% 55% 45% 18% 27% 18% Population in scope for fieldwork / / / / / / / / / / / / / / / 100% 41% 59% 41%
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9.5. Questionnaire
PRIVATE & CONFIDENTIAL
FSA – Interest-only mortgages FINAL VERSION
4236 4 September 2006
DEFINITE OUTCOMES 1 2 3 4 5 6 Complete interview Refusal Dead line (no dial tone) Not available within fieldwork period Out of quota Screen out LIVE OUTCOMES 7 8 9 10 11 Hard appointment Soft appointment Engaged Faxline No reply/answering machine
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INTRODUCTION AND BACKGROUND S1) Good morning/afternoon/evening, my name is XXX and I am calling from IFF Research, an independent research company working on behalf of the Financial Services Authority (FSA). Please could I speak to [INSERT NAME FROM SAMPLE]? Yes Make appointment Refusal Not available in deadline Engaged No reply/answering phone Dead line 1 2 3 4 5 6 7 Continue Make appointment Thank and close
Call back Close
WHEN SPEAKING TO RESPONDENT S2) Good morning/afternoon/evening, my name is XXX and I am calling from IFF Research, an independent research company working on behalf of the Financial Services Authority (FSA). The FSA is the chief watchdog for the financial services industry. It is an independent body that aims to protect the rights of consumers. The FSA are carrying out interviews with people such as yourself who have recently bought an interest-only mortgage. They are conducting these interviews to help them understand why people choose to buy particular types of mortgages. The FSA sent you a letter recently explaining about the study. We’d just like to ask you a few questions about your mortgage, it should take no longer than 15 minutes. OK to continue Make appointment Refusal Not available in deadline Reassurances if necessary • • • The FSA is the chief watchdog for the financial services industry. It is an independent body that aims to protect the rights of consumers. The interview will take around 15 minutes. We obtained your details through the FSA. They wrote to you about this research and offered you the chance to opt out of the research. 47 1 2 3 4 Go to S3 Make appointment Thank and close
•
IFF Research is an independent market research company, operating under the strict guidelines of the Market Research Society’s Code of Conduct. This means that anything you tell us will be treated in the strictest confidence, and none of your answers will be attributed to you. Your answers will only be presented in the form of aggregated statistics so that they cannot be attributed to you individually.
• • •
If you would like to check IFF Research’s credentials, you can call the Market Research Society, free of charge, on 0500 396999. If you would like to know more about IFF Research, you can call Alistair Kuechel, Project Manager, on 020 7250 3035, or email Alistairk@iffresearch.com. If you would like to verify that this is a legitimate piece of research commissioned by the FSA, you can call Errol Walker on 020 7066 0814.
S3)
Your lender gave us your name as someone who has recently taken an interest-only mortgage. Was this a new mortgage or have you recently re-mortgaged? PROMPT IF NECESSARY. CODE ONE ONLY. New mortgage Re-mortgage Mortgage has been paid-off/no mortgage outstanding Do not have an interest-only mortgage 1 2 3 4 Ask 3a Ask S5 Thank and close
S3a)
And is your mortgage…? READ OUT. CODE ONE ONLY. All interest only Part interest only Don’t know 1 2 X
ASK IF NEW MORTGAGE (S3=1) S4) And what was the reason for taking out the mortgage? READ OUT. CODE ONE ONLY. To buy my main residence To exercise my right to buy To release some/all of the value of my home To buy a second home or (residential) investment property To secure finance for business/commercial venture 1 2 3 4 5 Proceed to interview (A1a) Ask S6 Ask S10 Ask S8
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ASK IF RE-MORTGAGE (S3=2) S5) And what was the reason for re-mortgaging? READ OUT. CODE ONE ONLY. To obtain a better rate To change the product (e.g. flexible features) To make home improvements To consolidate debt To change repayment method To release money from my property/release equity 1 2 3 4 5 6 Ask S11 Ask S6 Proceed to interview (A1a)
ASK IF AGE IS 55+ FROM SAMPLE AND RE-MORTGAGED TO RELEASE EQUITY (AGE=55+ AND (S5=6 OR S4=3)). IF AGE UNDER 55 FROM SAMPLE AND S5=6 OR S4=3 PROCEED TO INTERVIEW (A1a) S6) What happens to your property at the end of the mortgage term? DO NOT READ OUT. PROMPT IF NECESSARY. CODE ONE ONLY. At the end of the mortgage my home will be sold and all/part of the money will go to the lender At the end of the term the lender will own my property The mortgage term will end when I die, if I move into a care home I will be required to pay off the capital if I have not already done so. I will own my home Don’t know 1 2 3 4 5 X Proceed to interview (A1a) Ask S7 Thank and close
ASK IF DON’T KNOW WHAT HAPPENS TO PROPERTY AT END OF TERM (S6=DON’T KNOW). S7) Has your mortgage been described as a ‘lifetime mortgage’ or as ‘equity release’? CODE ONE ONLY. Yes No Don’t know 1 2 X Thank and close Proceed to interview (A1a)
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ASK IF MORTGAGE TO SECURE FINANCE (S4=5) S8) Is the property used for residential purposes? CODE ONE ONLY. Yes In part No 1 2 3 Ask S10 Ask S9 Thank and close
ASK IF USE IN PART FOR RESIDENTIAL PURPOSES (S8=2) S9) Is 40% or more of the property used for residential purposes? ADD IF NECESSARY: An estimate is ok. CODE ONE ONLY. Yes No Don’t know 1 2 X Ask S10 Thank and close
ASK IF BOUGHT SECOND HOME OR INVESTMENT PROPERTY (S4=4 OR S8=1 OR S9=1) S10) And who lives in the mortgaged property? READ OUT. CODE ONE ONLY. Mortgage holder (myself) A relative The beneficiary of a trust A tenant/friend/non-related person The property is a commercial property (less than 40% used for residential purposes) 1 2 3 4 5 Thank and close Proceed to interview (A1a)
ASK IF RE-MORTGAGED TO CHANGE PAYMENT METHOD (S5=4 or 5) S11) You mentioned that you re-mortgaged to an interest-only/part interest-only loan. What repayment method was your previous mortgage? Repayment Part interest only Interest only Don’t know 1 2 3 X Proceed to interview (A1a)
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SECTION A – REPAYMENT VEHICLE ALL RESPONDENTS TO BE GROUPED INTO FOUR GROUPS AS FOLLOWS GROUP GROUP 1 GROUP 2 GROUP 3 GROUP 4 DESCRIPITION Have repayment vehicle in place No repayment vehicle in place – have plans on how will pay back No repayment vehicle in place – rough idea of how will pay back No repayment vehicle in place – no plans on how will pay back DEFINITION (A4=1) (A9=1 AND A10 is not X) (A19=1 AND A20 is not X) (A9=2 or X AND A19=2 or X) OR (A19=1 AND A20= X)
A1a
Firstly I’d like you to ask you some questions about the interest-only mortgage which you bought recently. What is the term of your interest-only mortgage? ADD IF NECESSARY: By that I mean how many years have you borrowed the money for? WRITE IN. ALLOW DON’T KNOW.
A1b
IF DON’T KNOW PROMPT WITH RANGES. PROBE IF NECESSARY: Is it for over 25 years or less than 25 years? 10 years or less 11 to 15 years 16 to 20 years 21 to 25 years 26 to 30 years 31 to 35 years Over 35 years Don’t know 1 2 3 4 5 6 7 X
A2a
And how much are your monthly mortgage repayments? WRITE IN. ALLOW DON’T KNOW. £
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A2b
IF DON’T KNOW, PROMPT WITH RANGES. Under £200 £200-£299 £300-£399 £400-£499 £500-£599 £600-£699 £700-£799 £800-£999 £1,000-£1,499 £1,500 or over Don’t know 1 2 3 4 5 6 7 8 9 10 X
ASK IF NEW MORTGAGE (S3=1) A2c And when you took out your mortgage, what deposit did you put down? WRITE IN. ALLOW DON’T KNOW. INTERVIEWER NOTE: If respondent says they put no deposit down (100% mortgage), code 0. £ A2d IF DON’T KNOW, PROMPT WITH RANGES. No deposit (100% mortgage) £1-£1,000 £1,000-£1,999 £2,000-£2,999 £3,000-£3,999 £4,000- £4,999 £5,000-£9,999 £10,000 or over Don’t know 1 2 3 4 5 6 7 8 X
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ASK ALL A3 You have told us you have an interest-only mortgage. Which of these best describe what an interest-only mortgage is…? READ OUT. CODE ONE ONLY. Your monthly repayment includes a payment for the interest and also a repayment of the amount borrowed, so at the end of the mortgage term you owe nothing Your monthly repayment to the mortgage lender is only the interest on the money borrowed, so at the end of the mortgage term you still have to repay the full amount borrowed Your monthly repayment mainly covers the interest on the mortgage loan, but includes just a small payment to repay the money borrowed, so at the end of the term you only owe some of the money borrowed Don’t know
1
2
3
X
A4
I’d now like you to think about how you are planning to repay the mortgage which you bought recently. Do you currently have a savings or investment plan set up which will pay off the mortgage in the future? DO NOT READ OUT. CODE ONE ONLY. ADD IF NECESSARY: By that I mean do you have an investment in place that will eventually pay off the full amount/capital that you borrowed? Yes No Already paying mortgage off Don’t know 1 2 3 X Ask A9 Ask A5
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ASK IF HAVE PAYMENT VEHICLE IN PLACE (A4=1) A5 What investment or investments do you have in place to pay off the full capital of your mortgage? DO NOT READ OUT. CODE ALL THAT APPLY. ISAs Stocks and shares Endowment policy Savings/deposit accounts at bank/building society Pension fund Premium bonds Investment or growth bonds Unit trusts Government bonds Other properties Don’t know Other (specify) 1 2 3 4 5 6 7 8 9 10 X 0
A6 A7
Question deleted And when do you expect you will have paid off your full mortgage in full? PROMPT IF NECESSARY. CODE ONE ONLY. Within the next 5 years Within the next 10 years Within the next 15 years Within the next 20 years In over 20 years’ time Depends on how well the investments do Don’t know/not sure 1 2 3 4 5 6 X
A8
Question deleted
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ASK IF NO PAYMENT VEHICLE IN PLACE (A4=2, 3 or X) A9 Do you have any future plans or strategies to pay off the full amount that you borrowed? Yes No Don’t know 1 2 X Ask A10 Ask A19 Ask A19
ASK IF HAVE FUTURE PLANS (A9=1) A10 What are your future plans or strategies for paying off the full capital of the mortgage? DO NOT READ OUT. CODE ALL THAT APPLY. Take out/invest in ISAs Take out/invest in endowment policy Take out/invest in pension fund Take out/invest in stocks and shares or other investments such as unit trusts and bonds Put money in savings account with bank or building society Switch to repayment mortgage later Use savings/other investments that already have Use future bonuses Use expected inheritance Proceeds of sale of mortgaged property Will buy smaller property (trade down) Sale of another property Don’t know/not thought much about it Other (specify) 1 2 3 4 5 6 7 8 9 10 11 12 X 0 Ask A19 Ask B1 Ask B1 Ask A14 Ask B1 Ask A11
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ASK IF PLAN TO INVEST (A10=1, 2, 3, 4 or 5) A11 When do you envisage that you will start investing in [INSERT TEXT: A10=1”ISAs” A10=2 “an endowment policy”, A10=3 “a pension fund”, A10=4 “stocks and shares or investments”, or A10=5 “a savings account”]? PROMPT IF NECESSARY. CODE ONE ONLY. Within the next year Within the next 2 to 3 years Within the next 4 to 5 years Within the next 5 to 10 years In over ten years’ time Don’t know 1 2 3 4 5 X
A12 A13
Question deleted Question deleted
ASK IF PLAN TO SWITCH TO REPAYMENT MORTGAGE (A10=6) A14 When do you envisage that you will be in a position to switch to a repayment mortgage? PROMPT IF NECESSARY. CODE ONE ONLY. Within the next year Within the next 2 to 3 years Within the next 4 to 5 years Within the next 5 to 10 years In over ten years’ time Don’t know A15 1 2 3 4 5 X
And why do you think you will be able to switch to a repayment mortgage then? DO NOT READ OUT. CODE ALL THAT APPLY. Will earn more/will have had pay rise/promotion Will be able to afford it Will have paid off other loans and debts Expect inheritance Investments will mature Don’t know/haven’t thought about it Other (specify) 56 1 2 3 4 5 X 0
A16 A17 A18
Question deleted Question deleted Question deleted
ASK IF HAVE NO REPAYMENT PLANS/STRATEGIES (A9=2 or X OR A10=X) A19 Although you have no definite plans or strategies in place, do you have a rough idea of how you may pay off the mortgage? Yes No Don’t know 1 2 3 Ask A20 Ask B1
ASK IF HAVE ROUGH IDEA HOW WILL PAY BACK (A19=1) A20 And how do you think you might do this? DO NOT READ OUT. CODE ALL THAT APPLY. PROBE IF NECESSARY: What sort of things might you do to pay back the loan? Take out/invest in ISAs Take out/invest in endowment policy Take out/invest in pension fund Take out/invest in stocks and shares or other investments such as unit trusts and bonds Put money in savings account with bank or building society Switch to repayment mortgage later Use savings/other investments that already have Use future bonuses Use expected inheritance Proceeds of sale of mortgaged property Will buy smaller property (trade down) Sale of another property Don’t know/not thought much about it Other (specify) 1 2 3 4 5 6 7 8 9 10 11 12 X 0
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SECTION B – UNDERSTANDING OF INTEREST-ONLY MORTGAGES ASK ALL B1 Still thinking about your mortgage, why did you choose to take out an interest-only mortgage? DO NOT READ OUT. CODE ALL THAT APPLY. Advised Adviser recommended Simpler/easier to understand Affordability Only one could afford at the moment Monthly repayment is lower Eligibility Easier to get from lenders Offers better income multiples Change in future circumstances More time to save/raise funds to pay off Expect bonuses/inheritance in future Don’t know Other (specify) 7 8 X 0 5 6 3 4 1 2
B2
What do you think are the main benefits of an interest-only mortgage? DO NOT READ OUT. CODE ALL THAT APPLY. Monthly repayment is lower Easier to get from lenders Offers better income multiples Simpler/easier to understand More time to save/raise funds to pay off Can pay off chunks of capital (as and when have monies) Might be more suitable if income fluctuates Good if income will rise in future Can use other investments (e.g. inheritance/bonuses) to pay off loan No real benefits/same as any other mortgage Don’t know Other (specify) 58 1 2 3 4 5 6 7 8 9 10 X 0
B3
And what would do you think are the main drawbacks of an interest-only mortgage? DO NOT READ OUT. CODE ALL THAT APPLY. More expensive in the long term You do not pay back any of the money borrowed There is a risk may not be able to pay (all) money back by end of term Complicated/hard to understand Need to set up a separate savings vehicles Temptation to use savings for other purposes Could lose house/house at risk if don’t repay loan in full No real drawbacks/same as any other mortgage Don’t know Other (specify) 1 2 3 4 5 6 7 8 X 0
ASK IF INVESTED OR PLANNING TO INVEST IN SAVINGS/INVESTMENTS (A4=1 OR A10=1,2,3,4,5, or 7 OR A20=1,2,3,4,5 or 7) B4 READ SLOWLY: You mentioned earlier that you are planning to invest or have invested money in order to pay off the money you borrowed. You will need to keep contributing to these savings and investments and monitoring what they are worth to ensure that there are sufficient funds to pay off the loan in full at the end of the term. How aware were you of this? Were you fully aware, were you not sure or were you not aware at all? CODE ONE ONLY. CODE ONE ONLY. Fully aware Not sure Not aware at all Don’t know 1 2 3 X
B5
And how much risk do you feel there is that your investments may not pay off your loan? Do you feel…? READ OUT. CODE ONE ONLY. There is a significant chance my investment will not pay off my loan There is some chance my investments will not pay off my loan Confident my investments will pay of my loan Certain my investments will pay of my loan DO NOT READ OUT: Don’t know 1 2 3 4 X
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ASK IF EXPECTING TO USE BONUS/INHERITANCE/OTHER (A10=8,9 or 0 OR A20=8,9 or 0) B6 You mention earlier that you are planning to use monies from [INSERT TEXT A10 or A20=8 “future bonuses”, A10 or A20=9 “expected inheritance”, A10 or A20=0 “INSERT TEXT FROM OTHER”] to pay off the money you borrowed. With [these sorts of plans] there is a risk that you might not have enough to pay off the loan in full at the end of the term. How aware were you of this? Were you fully aware, were you not sure or were you not aware at all? CODE ONE ONLY. CODE ONE ONLY. Fully aware Not sure Not aware at all Don’t know 1 2 3 X
ASK IF USING SALE OF PROPERTY/TRADING DOWN (A10=10,11,12 OR A20=10,11,12) B7 You mentioned earlier that you were planning to use money from the sale of the property to pay off the money that you borrowed. What disadvantages (if any) do you think such a repayment strategy might have? DO NOT READ OUT. CODE ALL THAT APPLY. Might not have enough money remaining after paying off mortgage to buy another house The value of my mortgaged property may not grow at the same rate as the type of property I would trade down to House prices might decline in comparison to amount owed on mortgage (negative equity) My circumstances might change No disadvantages Other (specify) Don’t know ASK ALL B8 If you cannot pay the loan in full by the end of your mortgage, the mortgage provider has the right to sell your house to pay back the mortgage. How aware were you of this? Were you fully aware, were you not sure or were you not aware at all? CODE ONE ONLY. CODE ONE ONLY. Fully aware Not sure Not aware at all Don’t know 60 1 2 3 X 1 2 3 4 5 0 X
SECTION C – PROCESS OF CHOOSING A MORTGAGE C1 I’d now like to talk through the process you went through when choosing a mortgage. Were you given any advice from a professional adviser at any point during the purchase of your mortgage? Yes No Don’t know 1 2 X
C2
And which of the following four statements best describes the way you chose which mortgage to take out? READ OUT. CODE ONE ONLY. I chose one recommended by a professional adviser I was influenced in my final choice by a professional adviser I was influenced in my final choice by a friend, relative or someone else I made the choice entirely by myself DO NOT READ OUT: Don’t know 1 2 3 4 X
NB: Comparable with QJchoic on financial capability survey. QC question to ensure comparability ASK IF RECEIVED ADVICE OR RECOMMENDED BY A PROFESSIONAL ADVISER (C1=1 OR C2=1) C3 And which of the following applies to you…? READ OUT. CODE ALL THAT APPLY. I (we) asked to receive advice on what would be the most suitable mortgage for me I received a letter explaining why the mortgage was being recommended for me The professional adviser confirmed verbally that I was receiving advice The paperwork provided with the loan confirmed that advice would be given DO NOT READ OUT: Other (specify) DO NOT READ OUT: Don’t know 1 2 3 4 0 X
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C4
Thinking about when you were recommended your mortgage, did you discuss with your adviser, or did they explain any of the following…? READ OUT. CODE ALL THAT APPLY. If you had a preference for interest-only or repayment mortgage Why an interest-only mortgage was more suitable for you How affordable an interest-only mortgage might be Your employment or job status Your existing outgoings and financial commitments Any special features of the mortgage (e.g. early repayment charge) How you would repay the capital on the mortgage DO NOT READ OUT: Don’t know 1 2 3 4 5 6 7 X
ASK ALL C5 When thinking about what type of mortgage to take, did you consider a repayment mortgage? Yes No Don’t know 1 2 X
C6
During the process of taking your mortgage were any possible disadvantages of an interestonly mortgage explained to you? DO NOT READ OUT. CODE ALL THAT APPLY. Risk that won’t be able to pay back capital Risk of losing home if can’t pay back at maturity That investments may not perform adequately to pay back Might be more expensive Circumstances might change in future There may be costs involved in changing to a repayment mortgage No disadvantages mentioned Other (specify) Don’t know 1 2 3 4 5 6 7 0 X
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ASK IF ATTENTION DRAWN TO DISADVANTAGES (C6 is not 7) C7 How did you find out about these possible disadvantages? DO NOT READ OUT. CODE ALL THAT APPLY. I was already aware It was explained to me by my lender or adviser From paperwork given to me with the mortgage (ie KFI, IDD, etc) Consumer information or factsheets from the FSA, CAB etc Other (specify) Don’t know 1 2 3 4 0 X
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SECTION D – CURRENT PAYMENTS D1 And thinking about the payments you currently make on your mortgage, how easy is it to keep up with mortgage repayments? Would you say you…? READ OUT. CODE ONE ONLY. Keep up with payments without any difficulties Keep up with payments but struggle to do so from time to time Keep up with payments but it is a constant struggle Sometimes fall behind with payments Always fall behind with payments Mortgage payment paid in part by the Department for Work and Pensions (DWP) Don’t know NB: Comparable with QJeasre on financial capability survey D2 IF EXACT FIGURE GIVEN AT A2a: You have told us that your monthly mortgage repayment is [INSERT FIGURE FROM A2a]. How easy would it be if your monthly repayments were to rise to [INSERT (A2a/100 x 17) + A2a] (a 17% increase). Would you say you…? READ OUT. CODE ONE ONLY. IF RANGE GIVEN AT A2b: You have told us that your monthly mortgage repayment is between [INSERT BAND FROM A2b]. How easy would it be if your monthly repayments increased by around 17%? Would you say you…? READ OUT. CODE ONE ONLY. IF DON’T KNOW MONTHLY REPAYMENT AT A2b: How easy would it be if your monthly mortgage repayments increased by around 17%? Would you say you…? READ OUT. CODE ONE ONLY. Could pay mortgage and other financial commitments without any difficulties Could pay mortgage without any difficulties but would struggle to pay other financial commitments Would struggle to pay mortgage and other financial commitments Would struggle to pay mortgage and would fall behind with payments for other financial commitments Would fall behind with mortgage payments and other financial commitments Don’t know NB: Comparable with QJincre on financial capability survey 64 1 2 3 4 5 6 X
1 2 3 4 5 X
SECTION E – PERSONAL/HOUSEHOLD DEMOGRAPHICS E1 I have now got a few questions about the make-up of your household. The reason we ask these is so that we can classify your answers with those from households of a similar nature to your own. So, including yourself, how many people live in the household? PROMPT IF NECESSARY. 1 2 3 4 5+ Refused 1 2 3 4 5 6
ASK IF TWO PEOPLE OR MORE IN HOUSEHOLD (E1=2,3,4 OR 5) E2 And how many children (aged under 16) live in the household? PROMPT IF NECESSARY. 0 1 2 3 4 5+ Refused 1 2 3 4 5 6 7
ASK ALL E3 Are you currently…? READ OUT. CODE ONE ONLY. Married Cohabiting or living with a partner Single DO NOT READ OUT: Refused DO NOT READ OUT: Other (specify) 1 2 3 4 0
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ASK IF MARRIED OR LIVING WTH PARTNER (E3=1 OR 2) E4 And can I just check, is the house owned by just you, or you and your partner or spouse? CODE ONE ONLY. Owned by me Joint owned Don’t know 1 2 X
ASK IF MORE THAN ONE ADULT IN HOUSE (E1 minus E2=more than 1) E5 And can I just check, are you the main income earner of the household? Yes No Refused 1 2 3
E6
Is there anybody else in your household, such as a spouse or partner, who contributes to your household income? Yes No Refused 1 2 3
ASK IF MAIN INCOME EARNER OR IF ONLY ADULT IN HOUSE (E5=1 OR E1 minus E2=1) E7 And what is your current occupation? PROBE FULLY FOR FULL JOB TITLE, INCLUDING INDUSTRY AND RELEVANT PROFESSIONAL QUALIFICATIONS. CHECK WHETHER SELF EMPLOYED. WRITE IN REFUSED
ASK IF NOT MAIN INCOME EARNER (E5=2 OR 3) E8 And what is the current occupation of the main income earner? PROBE FULLY FOR FULL JOB TITLE, INCLUDING INDUSTRY AND RELEVANT PROFESSIONAL QUALIFICATIONS. CHECK WHETHER SELF EMPLOYED. WRITE IN REFUSED 66
ASK IF SINGLE INCOME ON SAMPLE AND SOMEONE ELSE CONTRIBUTES TO HOUSEHOLD INCOME (‘INCOME BASIS’ ON SAMPLE=SINGLE AND E6=1) E9 And taking into account all incomes, which of these bands would your households total annual income falls into? READ OUT. CODE ONE ONLY. Less than £15,000 £15,000 to less than £20,000 £20,000 to less than £25,000 £25,000 to less than £30,000 £30,000 to less than £40,000 £40,000 to less than £50,000 £50,000 to less than £75,000 £75,000 to less than £100,000 £100,000+ Refused 1 2 3 4 5 6 7 8 9 X
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SECTION F – FINANCIAL CIRCUMSTANCES F1 We are coming to the end now. I just have a few question about any debts you may have. Again this is to help us classify your answers. So, apart from your mortgage, do you have any borrowings from any other sources such as personal loans, credit or store cards, or financial agreements such as for a car or furniture? Yes No Refused Don’t know 1 2 3 X
ASK IF HAVE DEBTS (F1=1) F2 Approximately what is the total value of loans (approximately how much do you owe in total)? PROMPT IF NECESSARY. CODE ONE ONLY. Less than £500 £500-£999 £1,000-£1,999 £2,000-£4,999 £5,000-£9,999 £10,000-£19,999 £20,000-£29,999 Over £30,000 Refused Don’t know 1 2 3 4 5 6 7 8 9 X
F3 F4 F5 F6
Question deleted Question deleted Question deleted Question deleted
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ASK ALL F7 And finally, which of the following three statements would you say comes closest to describing your own attitude toward financial products? READ OUT. CODE ONE ONLY. I have a very good knowledge and understanding of financial products and services; I like reading the financial pages of the newspapers and I like to make my own choices about financial products and services I have a reasonable knowledge of personal finance products and services and I am able to weigh up the advice of finance professionals when choosing a product to suit my personal circumstances Financial issues are best left to the experts. I generally rely on the advice of financial advisers, friends or relatives about which products are best for me
1
2
3
F8
Many thanks for your help in this important study. The FSA may be doing further work on mortgage related issues in the future. Would it be okay to contact you again in relation to future studies? Yes No 1 2
F9
DO NOT READ OUT: Record gender of respondent Male Female 1 2
INTERVIEWER NOTE: If respondent asks for any advice or further information: the FSA’s website is www.fsa.gov.uk and their telephone number is 020 7066 1000.
THANK RESPONDENT AND CLOSE INTERVIEW
I declare that this survey has been carried out under IFF instructions and within the rules of the MRS Code of Conduct. Interviewer signature: Finish time: Date: Interview length: mins
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