Interest only mortgages may seem like a great idea at the beginning of home ownership, but there are fears that there is a large and increasing number of householders reaching the end of their interest only mortgage term, who do not have any way of clearing their debt. These people risk having to sell their property and downsizing to something less desirable.
Regulations introduced by the Financial Conduct Authority, post economic crash, make it extremely difficult for older people to extend, or get new interest only mortgages, which has created the so-called Interest-Only timebomb effect. As a result, UK authorities have now decided to take action and a consultation paper has been produced to endeavour in rectifying this post-retirement mortgage issue in April 2018.
It is thought that up to two million householders may be facing interest only problems, being unable to pay off their mortgage as it draws to a close. Being forced to sell and settle may not leave them with enough capital to buy a smaller property with what they have left.
At the beginning of September, the Financial Conduct Authority (FCA) announced the possibility of reintroducing interest only mortgages for borrowers of more advanced years. This is still up for discussion, but the Retirement Interest Only Mortgage could be the salvation of many Interest Only mortgagors, as long as the correct permissions and advice is provided to those concerned.
The increase of interest only problems can be traced back to interest only loans linked to endowments that were supposed to pay off the debt, but performed too poorly in doing so. Additionally, many endowments fell by the wayside as they were encashed for alternative reasons, without transferring the mortgage onto a capital and interest basis. By switching to a capital & repayment mortgage, the payments to the lender would have increased, however there would be a guarantee the loan would be repaid at the end of the term.
With a mortgage where only the interest is paid, the lump sum is supposed to be settled at the end of the mortgage’s term. This could have been achieved using lender approved investment vehicles of which endowment policies were one. In addition, homeowners could also have used ISA’s, pension policies, sale of 2nd property, or other forms of investments. Alternatively, the homeowner can remortgage, but regulations have tightened, and lenders will demand proof of income & affordability.
Another option for those with interest only problems is to consider equity release, which can be used to pay off the balance outstanding on a house loan and allow the occupants to remain in situ. The equity release marketplace has adapted its lifetime mortgage plans to account for this exact reason; to attract those caught up in the interest only timebomb scenario.
Traditionally equity release schemes have been roll-up lifetime mortgages where no repayments were necessary. Obviously, this usually would have been unsuitable for those previously with interest only mortgages, as the balance would compound & increase over time. With the launch of interest only lifetime mortgages & plans with voluntary repayment options, homeowners can now manage the future balance of their equity release plan.
In summary, with the advent of the FCA proposal for Retirement Interest Only Mortgages and the current crop of flexible repayment lifetime mortgages, there is an improving landscape for those homeowners looking to remortgage and remain in the residential home, at or in retirement.
