Interest-only mortgage deals offered by the Church of England "backfired" leaving hundreds of former clergymen and their widows now trapped with rising interest payments and unable to own the home outright.
The Church is now consulting on how it can better prepare its priests for retirement following the fallout.
Now, leading clergy figures have highlighted the problems this has caused, with one saying the scheme: "was a bit too generous and has become unaffordable."
Many vicars were moved from parish to parish and provided with new accommodation, meaning they did not take on mortgages. To solve this, 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
Before 1983, the Church offered mortgages where the interest rate was fixed. However, just three of these home loans still exist today.
The new value-linked mortgages 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.
When the homes were eventually sold, the idea was that the Church would benefit from the increase in the house price. However, as both house prices and interest rates skyrocketed, 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.
One borrower’s daughter told The Observer that her late father’s loan, now the responsibility of his widow, had risen from £55,000 nearly 30 years ago to £313,000 today.
Chairman of the English Clergy Association Peter Smith 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."
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 three per cent or four per cent, 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."