Older borrowers could be given more options to refinance their home, or release equity through interest only mortgages. This comes after a rule change by the Financial Conduct Authority (FCA). Retirement interest-only deals have been redefined by the regulator as standard mortgages.
Although this may appear as a small technical change, borrowers who are struggling to pay off their interest-only mortgages could be offered help. Furthermore, those who want to unlock equity or move into a smaller home could stand to benefit from the changes.
A Small But Significant Change
Previously, the FCA collectively referred to retirement interest-only mortgages and equity release schemes as “lifetime mortgages”. Consumers were then required to get advice on the different types of products and the dangers of repossession.
The advice was compulsory even though retirement interest-only mortgages were much simpler than most equity schemes. There was no accumulation of interest, the sales process was easier and required less advanced qualifications. However, many lenders still withdrew from the market as a result because it appeared too complex. Nevertheless, the FCA is optimistic that the reclassification will result in more choice for consumers.
More Security Whilst in Retirement
Retirement interest-only mortgages would allow customers to pay monthly interest payments on their loan until they die or go into long-term care. The loan will then be paid back to the lender when the house is sold. Because the interest on a retirement interest-only loan is paid off each month, the owner keeps a larger share of the profits when the property is sold.
Something to Keep in Mind
When the homeowner continues to make their mortgage payments, they are only repaying the interest on the loan rather than the loan itself. As a result, borrowers will pay considerably less than people with repayment mortgages each month. However, borrowers will need to have a plan to repay the full loan at the end of the mortgage term.
Retirement Mortgages Offer Another Option
For older homeowners, it can be difficult to remortgage their properties because there are few interest-only deals available. There are also difficulties in getting approved for a repayment mortgage due to their age. Standard lifetime mortgage schemes involve a new mortgage being placed over the property and interest payments being included in the overall loan.
Such schemes have been criticised due to their high rates, which can eat into the equity built up in the property. In contrast, retirement interest-only mortgages can offer low monthly repayments, thus putting less pressure on retirement earnings. Some of the complexities and charges involved in equity release or lifetime mortgage deals are also avoided.
