In recent years, there have been many warnings about interest-only mortgages. The Financial Conduct Authority (FCA) stated how the organisation was “very concerned” with the vast number of people who face losing their homes because they are unable to repay the capital at the end of the mortgage.
Unfortunately, many people are finding themselves in this vulnerable position. There are approximately 1.67 million interest-only mortgages outstanding in the UK. Whilst many people risk losing their homes, there are things that others can do to avoid this.
What is the Problem with Interest-Only Mortgages?
With an interest-only mortgage, the borrower agrees to pay off interest each month without making any capital repayments. It is expected that these borrowers will have an investment plan in place; usually in the form of an endowment policy. With the investment plan, borrowers should be able to repay the capital at the end of their mortgage term. However, some people face a shortfall because their investment has underperformed. In other cases, some people never set anything up in the first place.
The FCA revealed in 2013 that around 1.3 million homeowners faced an average shortfall of over £71,000. So far in 2018, there are approximately 85,000 interest-only mortgages due to mature out of which there will be a high proportion of people who face losing their homes.
What Can Homeowners Do?
When someone with a maturing interest-only mortgage doesn’t want to sell their home but can’t repay the capital, their lender may agree to extend the term of the mortgage while switching the loan to a repayment basis. However, this may not work for many people because they will be repaying capital as well as interest, therefore their repayments will increase significantly.
A borrower’s age may also be a significant factor when repaying capital. On average, one in nine of all interest-only mortgage holders are aged 65 and over. Some lenders have a maximum age at the end of their term which may shorten the mortgage term to such an extent that it means the payments would be unaffordable. Nevertheless, there are some lenders who have increased their maximum age limit. There are others that will consider lending into retirement.
Equity release may also be a solution. This is a way of getting cash out of a property without the need to move home. Normally, there are no monthly repayments. Involved The most common equity release schemes are mortgage-based products secured against the home and repaid when the owner dies or goes into long-term care. These types of mortgages are known as lifetime mortgages.
Usually, a homeowner can raise a maximum of 55% of the property value. However, this would depend on factors like the type of property as well as the age and health of the owners. Some people with maturing interest-only mortgages may not be eligible for equity release as their loan-to-value will be too high.
Are there Interest-Only Deals for Older Borrowers?
There are a growing number of specialist products targeted at older borrowers, including those who are coming to the end of an interest-only mortgage deal. The retirement specialist Hodge Lifetime offer a 55+ Mortgage. It is a standard mortgage exclusively for those who are 55 years old and over. Interest is paid each month and 100% of home ownership is retained. The maximum loan-to-value on this mortgage is 60%.
Shawbrook Bank also has a 55 Plus Interest Only Mortgage. The main income earner of the household must be aged between 55 and 75. They must have a minimum income of £16,500 per year and must not be older than 85 at the end of the term. There are also minimum property value and equity requirements.
Family Building Society has a deal called Retirement Lifestyle Booster. This is a 10-year interest-only mortgage repaid with a lump sum at the end. Homeowners can borrow up to 25% of the property value. Borrowers could use this sum to repay their existing mortgage. The youngest borrower must be at least 60 years old at the time of application.
