There has been much publication around the subject of interest-only mortgages in the residential property market and later life lending. One option for people stuck with interest-only mortgages and looking for a solution to repay and maintain status quo, is a lifetime mortgage.
Here I wish to explain how the many flexible features of lifetime mortgages can help people in such situations.
Over the last few years lifetime mortgage lenders have become more creative and launched more products to satisfy the ever-increasing growing demands of Lifetime Mortgage customers. As an equity release specialist, I have been advising on this product over many years and have seen the lifetime mortgage plan evolve in this time. However, more recently I believe the game changer for many of my clients and one of the major factors why lenders are falling over themselves to bring more innovation to this growing market is because clients are demanding much more flexibility.
In the 1st quarter of 2018 we have seen one of the main lenders make their move in providing even more flexibility and appeal to this market by bringing out an optional payment plan. Before I go into the detail, one of the driving forces behind this type plan being so popular is that there is a sector of the population that have interest only mortgages with a shortfall on their investment vehicle (e.g. endowment) or actually have no repayment vehicle at all.
Up to now these clients have been servicing the interest payments which are lower than a repayment mortgage because:
1. they are only paying the interest element charged by the lender, therefore they are not chipping away at the capital.
2. interest rates have remained low over many years. The concern now is that D-Day for these clients is imminent and their mortgage lender is calling in the loan and demanding full repayment.
Difficulties faced by Interest-Only Borrowers
This is where many of the hardship stories arise as many mortgagors just want to continue to service the interest payments, however, most lenders want to put these clients through a rigorous stress test to see if affordability is in line with their current lending criteria. As the client is now retired and income into the household has dropped, then these homeowners are finding it increasingly harder to retain their mortgage.
In such circumstances, it’s important to seek independent financial advice, to consider all the options available. This could involve considering downsizing, repaying some of the mortgage balance from savings or investments if available, this then having a better chance of qualifying for a smaller mortgage.
However, where all these options have failed, for one reason or another then there is an alternative solution that’s actually the fasting growing part of the mortgage industry – Lifetime Mortgages.
One Option Available to Interest-Only Retirees
When traditional mortgages are unavailable, then a Lifetime mortgage can become the salvation for many interest-only prisoners. There are many flexible features to a lifetime mortgage that can suit homeowners looking to transfer from a residential interest-only mortgage scenario.
For a start, equity release lenders do not take into consideration a client’s income levels to asses if the loan is affordable. All that the lenders require is that the client’s property fits in with their lending criteria and the homeowners are over the age of 55.
What’s great now for the client is that they have what I referred to earlier as much more flexibility. Choice within this equity release industry is the driving force with great innovation. Customers can choose how they want to control their future balance & this will all depend on their situation; both family and financial.
For example, not everyone on a current interest-only mortgage may want to keep making mortgage payments. Instead, they have three options:
1. to cease making any payments towards their new lifetime mortgage plan, allow their interest to roll-up and instead have the benefit of using the payments saved as extra income for their retirement
2. to continue making interest-only payments on their new lifetime mortgage on a monthly basis, thus being able to maintain a level balance & controlling one’s inheritance
3. to opt for the flexibility of a voluntary payment plan. Here they can choose to pay anything upto 15% of the original amount borrowed. This way any repayments back to the equity release lender would be in line with affordability based on what the homeowner chooses, not the lender.
Now let’s look at an example case study of two of my recent clients. These will help explain the key differences and how flexible these features are in today’s Lifetime Mortgage market.
Voluntary Repayment Option – servicing the interest on an ad hoc basis
Ruth & Alan are both 65. They owe £14,000 for their mortgage, £19,000 on credit cards and £4,500 for a loan. The combined monthly cost for these 3 debts was £850 per month, which was a hug slice of their pension income each month. It was affecting their ability to enjoy their retirement.
They’ve borrowed £40,000 from a flexible lifetime mortgage lender, More2Life, to pay off all of these debts and plan to pay interest on the new equity release scheme to cover the interest each year. Based on an interest rate of 3.99% MER (4.2% APR), it will cost them £135 per month.
This they can repay to More2Life every 6 months by debit card via a call to the lender.
This has dramatically improved their standard of living as they have much more disposable income to enjoy and can now afford regular holidays, golf green fees and cope better with day to day bills. Of course, it does mean that the debt has become a lifetime debt, but, it’s easily affordable from either of their pension incomes, should one of them be left alone. Furthermore, the interest rate is fixed for life, and not effected from future Bank of England rate rises.
Optional Repayment Option- Servicing the interest on a monthly basis
John age 69 and Linda age 68 have a joint interest-only lifetime mortgage with Lloyds for £72,000 with an interest rate of 3.75% AER and cost them £225pm. They have been servicing the interest on this mortgage for the last 12 years which is affordable to them in retirement, but they have no repayment vehicle in place. They would be happy to continue servicing the debt, but unfortunately Lloyds are asking them to pay back the loan in the next 12 months.
John and Linda have been getting increasingly worried as they have no savings to cover this debt and they want to remain in the home at all costs. They just want to be able to continue servicing the debt on a monthly basis, maintaining status quo and be able to leave a substantial inheritance to their three children. They do not want to have any rolled-up interest which would increase the mortgage balance.
This is where I recommended an optional repayment plan which they have asked to pay the full amount of interest at a rate of 3.84% MER (4.10% APR) which is costing them £230.40 per month. Ok, this is a little higher than they have being paying with Lloyds, but this is guaranteed to be fixed for the rest of their lives, unlike their current rate with Lloyds which is variable and can go higher if interest rates move upwards.
They are locking into the current low equity release interest rates on offer for the long term and when the plan ceases, as long as they keep up the interest payments they will still owe just £72,000. More Importantly they can remain in the home without the threat of the lender calling in the loan until they either both pass away or go into long term care. Their payment goes out by direct debit each month, and if for whatever reason there is a drop in income in the household maybe because of the death of a spouse then either of them have the reassurance that their plan can revert to a roll up plan, but still have the facility should they wish to make voluntary repayments to keep the interest at bay.
What is also an important factor being that the lender has not taken any of the income into account when assessing if the they are eligible. All the lender wants is to know the property fits in with their criteria, is saleable & a good asset for the longer term.
If you wish to discuss any aspects of this article with myself, request advice or quotations, please contact –
Simon Maher - DipPFS CeRER
t: 07950 965193
e: [email protected]
w: Visit my individual adviser page here.
