Vicars trapped in retirement crisis with ‘unaffordable’ Church loans
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Hundreds of vicars are caught in a retirement property crisis after taking on “unaffordable” Church of England home loans.
Many former clergymen or their widows are now trapped after special interest-only mortgage deals offered by the Church of England “backfired” – leaving them with rising interest payments and unable to own the home outright.
The fallout means the Church is now consulting on how it can better prepare its priests for retirement.
Many vicars did not take on mortgages during their careers as they were moved from parish to parish and provided with accommodation by the Church.
To address the problem, the Church of England introduced a loan scheme in 1983 to help retired vicars get on the property ladder – at rates not available through high street lenders.
Known as value-linked mortgages, they allowed clergymen to buy a share of the property in cash and make interest-only repayments on the remainder loaned to them by the Church.
The idea was that when the homes were eventually sold, the Church would benefit from the increase in the house price.
But exponential house price growth and rising interest rates mean that around 400 vicars are currently trapped on these deals because they are unable to get a mortgage elsewhere and cannot afford to rent on the open market.
Mark Harris, of mortgage brokerage Howden Private Clients, said that it was “very surprising” the Church offered such products in the first instance, and that it should be sympathetic to those who feel they have been “mis-sold”.
He said: “These shared appreciation mortgages offer low rates of interest to the borrower in return for the lender having a share in the upside of the value.
“If there is no upside, then of course there is no profit to share, but house prices have soared and hence borrowers can find themselves in the unenviable position where they ‘owe’ the lender a significant proportion of the value of their home.”
The historic value-linked mortgage scheme, which ran from 1983 to 2008, let borrowers put down as little as a 5pc deposit on a house and also gave them the chance to make overpayments to gain a greater share.
Retired vicars who needed to move out of their parishes were drawn to the product, because it meant they could pay an interest rate of 3pc or 4pc – rather than the 16pc on offer at high street lenders at the time. No broker was needed to sign off on the deal, but independent legal advice had to be sought.
The catch was that interest rates were allowed to rise in line with increases to their pensions every year. Clergy pensions are set to rise by 6.7pc next month, after rising by 10.1pc last year.
The average mortgage interest repayment is now less than £400 a month, but a vicar with 25 years of service can expect to receive a pension worth just £650 a month.
‘More like renting than buying’
The Church of England’s Pensions Board has now admitted the arrangement “was more like renting than buying”, but said there was some upside for the borrower too if the property gained in value.
It is now consulting on how it can improve housing options for future retired clergymen. One option being considered is a new type of mortgage offered by a bank or building society, where the Church helps fund the deposit instead.
One borrower’s daughter told The Observer that her late father’s loan – now the responsibility of his widow – had snowballed from £55,000 nearly 30 years ago to £313,000 today.
Some 83pc of the house’s value today is still owned by the Church of England, which means it will still benefit from the lion’s share of house price growth when it is sold – despite the clergyman having suffered decades of payment increases.
The Church of England’s Pensions Board held nearly £25m worth of these mortgages on its balance sheet in 2022, a figure which is made up of 447 mortgaged properties.
Before 1983, the Church offered mortgages where the interest rate was fixed. But just three of these home loans still exist today.
‘Helpful’ scheme backfires
Peter Smith, chairman of the English Clergy Association, said: “I suspect the Church wanted to help them. But this scheme has backfired. It was a bit too generous and has become unaffordable. The fallout may well explain why the scheme finished [in 2008].
“If a clergyman dies and a loan like this is left to his widow, it is probably going to be a nightmare. It is always difficult when someone has a grace and favour property, retires and then has nowhere to live.
“Often clergymen can’t live in the same parish, because the former incumbent can’t be present when the new incumbent arrives. If they have family and friends, it can be really difficult to leave their community and uproot their relatives.”
Currently, the Pensions Board funds subsidised rents on 1,200 homes across England and Wales. But this financial aid is estimated to cost £20m a year, and has already forced the Pensions Board to seek extra funding from the Church for two successive years.
Until 2022, the Church also offered shared ownership deals – where retired clergymen could buy a 90-year lease for a share in the property of at least 25pc. The borrower then paid a rent and a service charge on the proportion of the property that they did not own.
The Church is pinning its hopes on a new housing offering which will reduce costs and attract younger people to ministry employment.
Gavin Ashenden, a former priest of the Church of England, said one of the problems with “being a client” of the Church of England was that he “never got to benefit from house price increases”.
He added: “I had no capital. I was a client of the Church. All my friends trained as lawyers and had lovely houses. I was on minimum wage from the age of 20 onwards. I had a roof over my head but I was locked out of the housing market. That’s a hell of a price to pay.
“Widows and divorcees have been left in a terrible mess. The Church is made up of 52 dioceses which are all run independently. This means it’s vulnerable to unkind administrative and institutional incoherence.”
A spokesman for the Church of England Pensions Board said: “These [value-linked] mortgages were designed to offer retired clergy the chance of home ownership at a time when they were unlikely to have been able to take out mortgages elsewhere.
“Interest rates were in the double digits for much of the 80s, and very high into the early 90s, putting home ownership beyond the reach of many. Meanwhile, the starting interest rates on these mortgages was typically around 3pc or 4pc, and increases in mortgage payments were limited to the increase in clergy pensions to support long-term affordability.
“The arrangement was more like renting than buying, but with some of the upside if the property gained in value. Retirees have always had the option to refinance with other providers – and the option of paying down the original loan, reducing their monthly payments and increasing their share of the property’s value.”
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