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There is a third option for older interest-only borrowers – Vernon BS

by: Tom Gurrie, intermediary sales manager at Vernon Building Society
  • 22/02/2018
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There is a third option for older interest-only borrowers – Vernon BS
If your interest-only client has a potential capital shortfall in retirement, selling their home or equity release are not the only options.

Nearly one in five outstanding mortgages is on an interest-only basis, so you potentially have a fair few on your client book.

Hopefully most of them have a repayment plan in place and are on track to pay off their debt, but realistically some of them will not.

The Financial Conduct Authority (FCA) warned this month that many interest-only borrowers could be at risk of losing their homes at the end of their term, so what should these borrowers do?


Options for interest-only borrowers

Switching to a repayment mortgage is one option, but how many interest-only borrowers can afford to do that?

Even part-and-part deals are financially unachievable for some borrowers, and may still leave a shortfall that can’t be repaid.

One option is equity release, which can be a solution, enabling them to pay off the interest-only mortgage debt by taking a lifetime deal.

But it isn’t the only option.


Lending beyond retirement

Mainstream lenders are still catching up with the demand for later-life lending, but a handful of innovative mortgage products do cater for older borrowers.

Times have changed and not everybody stops drawing an income at state retirement age – in fact many older borrowers are perfectly capable of paying a mortgage.

Whether it’s full-time or part-time work, a buy-to-let portfolio, private pension or other income, the finances of older borrowers are as diverse as any other group.

We’ve seen lenders increase their maximum age limit to borrowers on standard deals, but there is still a limit.

Retirement interest-only deals go further, as they often have no age limit, continuing until death or long-term care, when the sum is repaid from the sale of the property.

Retirement interest-only mortgages are making a comeback and they could be boosted further, with the FCA having recently consulted on separating out this product stream from the umbrella of lifetime mortgages.

In short, this will increase access for clients and brokers to these products, which is likely to bring more lenders to the sector.


Age is no barrier

If a borrower can prove affordability for their lifetime and has plans in place in case their income or circumstances change, we don’t think their age should prevent them from borrowing.

By taking out an interest-only retirement mortgage, borrowers can also avoid the interest roll-up of other lifetime deals.

The borrower will know exactly how much needs to be repaid on death or moving into long-term care and contingencies can be put in place from the start.

They may even go down the equity release route later on in life.

Of course, legal advice is always recommended on this type of mortgage because of the potential impact on the client’s estate or access to state benefits.

These are specialist products and they don’t suit everyone. But if any of your interest-only clients are facing a shortfall, they are certainly worth investigating.

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