1.67m full interest only and part capital repayment mortgage accounts remain outstanding in the UK
Then the credit crunch hit, and the failure of some endowment funds left many borrowers who thought they had a repayment vehicle with a deficit of thousands of pounds, whilst others struggled to meet lender affordability criteria to move onto a standard repayment mortgage, leaving them marooned on an interest only deal.
As it stands now, due to lending legislation introduced in 2014, ironically interest only mortgages are generally the preserve of high earners whose salaries are supplemented by large annual bonuses, or others whose financial position means that they have significant assets, such as stocks or shares or a portfolio of other properties, which specialist lenders use to mitigate the risk of an interest only mortgage.
Recently released statistics from the Financial Conduct Authority indicate that there are currently 1.67million full interest only and part capital repayment mortgage accounts outstanding in the UK, which represents 17.6 per cent of all outstanding mortgages.
Of this number, it’s estimated that a significant proportion of interest only customers are nearing retirement yet have no way to pay off the capital owed on their current interest only mortgages, meaning that we are entering into a period where a significant number of borrowers are at risk of having their home repossessed by their current mortgage lender if they aren’t able to find a way to repay the capital which is still owed.
Selling and downsizing is a straightforward way of dealing with an interest only mortgage
If you’re considering applying for a later life mortgage, you’ll need to evidence sustainable retirement income, for example a pension or an annuity
There is a straightforward way to solve the challenge of having an interest only mortgage which is coming to the end of its term, and that is of course to sell and downsize to release the capital in the property and pay off the outstanding amount.
But what if you don’t want to move home? Or if there wouldn’t be enough capital left in the property to purchase somewhere else once you’ve paid off the mortgage?
Fortunately, there is an awareness amongst lenders that significant numbers of clients with interest only mortgages are approaching retirement and require assistance, which has led to a number of differing types of products and plans becoming available to address exactly this situation.
There are, essentially two different ways to deal with the issue. The first option is to take out a further interest only mortgage using a specialist later life borrowing product.
A number of lenders offer products designed to accommodate those who wish to borrow into retirement
Although the majority of mainstream mortgages have an upper age limit, for example many lenders will only allow borrowers up to the age of seventy, a number of lenders offer specific products designed to accommodate those who wish to borrow into retirement.
Brian Murphy, Head of Lending at Mortgage Advice Bureau explained: “If you’re considering applying for a later life mortgage, you’ll need to evidence sustainable retirement income, for example a pension or an annuity. However, providing this is in place, a number of these specialist products don’t carry any upper age restriction, and therefore facilitate the borrower switching from one interest only mortgage to another seamlessly to enable them to stay in their own property.”
Brian continued: “Of course, as with any other interest only product, the capital borrowed is still outstanding, which does need to be factored into any estate planning as proceeds from the sale of the property in later years will be needed to repay the capital owed to the lender in the first instance.”
However, for those who don’t have an ongoing income into retirement, another solution could be to utilise an equity release product.
Twenty or so years ago, equity release had a somewhat unsavoury reputation, due to the availability of products which could leave borrowers with negative equity.
However, the intervention of the Financial Conduct Authority in 2004, who now regulate all equity release products, together with the strict code of conduct enforced by the Equity Release Council, the industry body for the equity release industry that represents lenders, financial advisers, solicitors, surveyors and other professionals operating in the sector, means that it’s now far easier and safer to navigate for consumers.
Equity release as a whole is a rapidly expanding market, which saw a 41 per cent increase in customer applications in 2017 with £3.01billion lent last year, compared to £2.15billion the previous year.
As Dean Mirfin, Chief Product Officer of equity release specialists Key Retirement explained: “Five or six years ago, 16% of clients that we saw were entering into an equity release plan in order to pay off some sort of mortgage on their home, many of which were endowment shortfall cases.”
Equity release is a rapidly expanding market, and it saw a 41% increase in applications in 2017
Dean continued: “Now, we’ve seen the numbers of those using equity release as a solution to repay a mortgage increase to 22 per cent, and we’re seeing more people who are nearing retirement with no repayment method at all, in other words interest only mortgages, approaching us for assistance. Typically, we see clients with relatively conservative loans against much higher property values, and these cases are very straightforward to assist. However, age isn’t a barrier in terms of equity release, as typically the older you are, the more capital you are able to draw down from your property.”
Generally speaking, equity release products tend to fall into one of two types of product, Lifetime Mortgages or Home Reversion Plans.
The first, Lifetime Mortgages, are the most popular form of equity release product because they allow the borrower to retain legal ownership of their home.
The equity release provider advances an amount which is borrowed against the security of the property, and interest on the amount borrowed accrues, or ‘rolls up’, every month.
The capital amount plus the rolled-up interest is then repaid on death of the borrower or that of their surviving partner, or if the borrower moves into permanent care.
Some Lifetime Mortgage plans provide the borrower with the flexibility of either taking the lump sum borrowed as one single amount, or the ability to draw it down in stages.
The latter is usually a more cost-effective option as it means interest is only paid on the amount that has been advanced to date.
For borrowers who want to reduce the amount of roll up interest payable at the end of plan, some Lifetime Mortgages allow borrowers to make interest only payments, which has the benefit of enabling any beneficiaries to receive as much of the value of the property as possible once the capital has been repaid.
Home Reversion plans operate in a totally different way to Lifetime Mortgages.
With this type of product, the home is sold to the equity release provider for a cash lump sum, who then provides a lifetime lease to enable the client to reside in their home for as long as they wish.
Some schemes enable part ownership of the property, for example you might decide to sell half of your property to the equity release provider. This means that you are still able to pass on part of the property to any beneficiaries of your estate.
Of course, If you’re considering an equity release product of any sort, it’s important to ensure that you not only use a sector-specific adviser, preferably one who is independent and therefore can advise on all of the products available in the market, but also take legal advice from a specialist solicitor.
But whether you opt for another mortgage product or decide to investigate equity release, for those currently heading towards retirement with an outstanding interest only mortgage, the best advice is don’t bury your head in the sand and speak to your current lender as soon as you possibly can.
There are a multitude of options out there, and the process of putting a solution in place is rarely as arduous as many fear and often less stressful than not doing anything at all.
Follow Louisa on Twitter: @louisafletcher