After spending more than 15 years living in the previous one, my wife and I moved to our current house around five years ago. It’ll come as no surprise to learn that as we moved in, a sizeable quantity of unopened plastic boxes filled with files, books and sporting paraphernalia mostly belonging to me, were deemed ‘non-essential’ and allocated a ‘temporary’ place in the garage.
Apparently, 90% of garages do not accommodate a car but are used for storage which, if you have older children who have moved away or finished university and now work in a different city, is provided free of charge. Our garage falls squarely into this category.
Recently, however, having assembled a pair of flat pack bookcases specifically for my underused home office, the time to reveal the (almost) forgotten contents of the dusty, slightly crumpled, boxes had arrived.
My plan was to jettison as many files as possible and transfer the books to their new home on the shiny new shelves. Despite tackling this project with the intention of getting it done within a couple hours, I failed miserably.
Frequently side-tracked (“I’ve been looking for this file for ages”), distracted (“So that’s where I put such-and-such book”), or having my attention diverted by the need to read the contents of an unmarked file, after two hours, the bookcases remained empty. At this rate, I mused, the job might be completed by Christmas 2026.
In many respects, ‘sorting out the garage’ or any other area where stuff accumulates, such as in an attic or garden shed, could be one of life’s most appropriate euphemisms.
Many of us (well, most blokes I know) hoard items or materials which, having served their purpose, are retained because they ‘could come in handy’. Simultaneous displays of inertia prevent us from ditching stuff, which is no longer useful, takes up unnecessary space or, worse still, could be a long term liability.
But how does such a scenario equate to life?
Around a decade ago, the Financial Conduct Authority (FCA) revealed that 1.67 million home loans were either interest-only or part-capital repayment mortgages; they could, the FCA suggested, become problematic if borrowers failed to make provision to repay their loans in full at the end of the mortgage term.
It might appear a million miles away, but the FCA forecast that a significant proportion of these mortgages would mature between 2027 and 2032.
Over the past ten years, the FCA has raised the matter periodically, at one point confirming it remained “very concerned that a significant number of interest-only customers may not be able to repay the capital at the end of the mortgage and be at risk of losing their homes.”
The authority predicted that almost half of those with interest-only mortgages would be unable to repay them when they matured and suggested that a majority of interest-only borrowers would be left with a shortfall of more than £50,000.
It’s easy to understand the appeal of interest-only mortgages; after all, they once offered a relatively inexpensive route onto the UK’s property ladder. Having scrambled onto the ladder’s first few rungs, however, many folks soon discovered how expensive property ownership can be.
While most people take out an interest-only mortgage with the intention of it being a relatively short-term measure, a precursor to eventually converting it to a regular, capital-plus interest repayment loan, the longer they leave it, the more expensive the conversion becomes.
In addition, a large proportion of people overlook the need to start repaying at least part of the capital they’ve borrowed. Others become so used to making comparatively low monthly repayments that the prospect of doubling, or trebling, their monthly mortgage costs fills them with dread.
No wonder.
Consider, for instance, a couple wishing to convert their interest-only mortgage of £85,000, scheduled to be repaid in, say, 2032 and on which the current level of interest payable is 5%. Let’s assume the interest rate they could obtain a seven-year repayment mortgage is 4.25%.
Worryingly for our virtual couple, their monthly repayments would rise from £354.17 to £1,172, a more than three-fold increase.
Admittedly, some borrowers could extend their mortgage term, but it’s estimated that more than 60% of interest-only mortgages scheduled to mature as soon as 2028 will belong to people aged over 65. It’s worth noting that while lenders tend not to have formal upper age limits for mortgages, most require details of how a regular, capital-plus-interest home loan will be repaid, especially in instances where the mortgage term is extended.
As a means of repaying an interest-only mortgage, downsizing might be the answer for some folks, but certainly not all. For a start, their existing home needs to be sold at a price which allows its owners to buy an acceptable alternative, while the emotional wrench of leaving a long-standing family home cannot be underestimated.
Fortunately, there is another possible solution: equity release
Releasing some of the property wealth people have accumulated over many years has two huge advantages: it can help homeowners rid themselves of their interest-only mortgage millstone and, in almost all cases, ensure they can remain in their own home for life without ever having to make a mortgage payment again.
Equity release comes in many guises, and can be either a Lifetime mortgage, Retirement Interest only Mortgage (aka RIO) and a Retirement mortgage which basically is residential mortgage, running over a fixed term, and can run beyond most lenders maximum age of 70.
Dependent on whether you wish to continue making payments in settlement of your existing interest only mortgage, usually determines which type of later life mortgage would suit.
For instance, the most popular type of equity release is the Lifetime mortgage. Here the amount you can borrow is not based on your income, but on the age of the youngest homeowner and your property value. Effectively, the older you are the higher the maximum loan becomes.
As an example, a homeowner aged 70 with a property value of £500,000 could release around 45% of their property value equating to £227,000. This amount can then be used towards settling an existing interest only mortgage that’s in need of settlement to the bank or building society.
RIOs, like traditional mortgages, have maximum borrowing levels that are purely based on your income and affordability and RIOs also run for the rest of your life. They have no fixed term and in that respect work similarly to a Lifetime mortgage. It’s worth noting also with a RIO, should it be a joint application, the income of the lowest earner needs to support the mortgage affordability in their own right, should they predecease the higher income earner.
Homeowners releasing money from their property could reduce the future value of their estate and may find that their entitlement to means-tested benefits is affected. Nevertheless, qualified equity release advisers are trained to recommend the most appropriate plans to suit almost all people still burdened with an interest-only mortgage. Contacting one of them could be akin to finally opening a crumpled, dust-covered cardboard box in a corner of the garage…
