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How to help interest-only customers with no repayment vehicle – analysis

by: Chris Menon
  • 19/09/2017
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How to help interest-only customers with no repayment vehicle – analysis
For the next 15 years it appears that a steady stream of interest-only mortgages will mature, leaving some customers with outstanding debts that need to financed. So what are the options for brokers?

Around 40,000 interest-only mortgages are estimated to mature each year from 2017 to 2032, according to the May 2017 report on Equity Release Schemes from Mintel. Of these, it estimates that around a quarter are thought to have a shortfall with no repayment vehicle.

This is certainly not a new issue as, according to estimates from the Council for Mortgage Lenders back in May, lenders have reported around 300,000 loans that did not redeem fully on their maturity date since 2011.

The CML is now subsumed within  UK Finance and it attempts to offer reassurance, saying that: “The majority that go past term actually redeem within the first three months. Only a minority of cases do not repay in this time frame but we do not have robust figures to provide here.”

FCA

In April this year, the Financial Conduct Authority (FCA) estimated that “around 1.8 million UK home owners currently have outstanding interest-only mortgages (excluding buy-to-let), and many do not have an appropriate strategy to repay them”.

Indeed, this explains why the FCA is particularly concerned about the issue of older consumers with maturing interest-only mortgages and no repayment vehicle, and those seeking to release equity from their homes without the cost of interest roll-up. Hence, it recently issued a consultation document to consider bringing back ‘retirement interest-only mortgages’.

These are interest-only mortgages for older consumers where, assuming there is no default, the loan is only repaid on a specified life event (usually the customer’s death or a move into residential care). Customers must still be able to afford the ongoing interest payments, but ultimately the loan is repaid through the sale of the property.

The FCA has previously classified retirement interest-only mortgages together with lifetime mortgages, as part of implementing the Mortgage Credit Directive, effectively calling both ‘lifetime mortgages’. However, it is now proposing to separate them, not least because of the different risk characteristics. 

The FCA explained: “Retirement interest-only mortgages have significantly different risks compared to lifetime mortgages. In particular, they do not feature the roll-up of interest, meaning that consumers are not at risk of rapid equity erosion and the subsequent reduction of funds available for a bequest.”

A final decision on implementation is expected to be made within three months of the end of the consultation process.

Options

So what are the options for borrowers whose interest-only mortgage matures leaving them with a debt?

According to the Council for Mortgage Lenders there are a variety of options including: taking out a lifetime mortgage, repaying via other means (such as pension pots), sale of the property (trading down) and switching to capital repayment terms.

Broker comments

Ray Boulger, senior technical manager at mortgage broker John Charcol, said all the above options are worthy of consideration depending on the individual circumstances of the borrower and their risk profile. Moreover, this is where the mortgage broker can really add value. “The role of the broker becomes increasingly important as the options broaden.”

David Hollingworth, press and media spokesman at London & Country, explains that in such a situation the customer is faced with extending the mortgage or having to find funds from elsewhere. “It could be using pension savings but it runs the risk of leaving them with a smaller lump sum, which could then affect their retirement income. Equity release could be an option but if they are at the younger end of the age scale, then the loan to value will be limited and some people may have been putting this off and still owe a reasonable proportion of the property value. Obviously, the sale of the property may still be open to them but it may not be their preference.Therefore they’ll be looking at alternative mortgage options.”

As there have been age caps on mortgages, with lenders expecting the mortgage to be repaid, typically by the age of 75, he believes the introduction of ‘retirement interest-only mortgages’, could open up a much broader range of mortgage options. “It would remove the need to have any specified term, unless the borrower sells, dies or moves into long-term care,” he explains.

Kay Ingram, a director at LEBC Group, advises: “The best advice I can give anyone whose interest-only mortgage is about to end, without an obvious repayment vehicle in place is don’t panic and consider all the options before deciding what to do. Just because the original loan has come to an end does not mean that it cannot be extended either with the same lender or a new one.

“The essential thing is to think about longer-term plans, also look at  current and future income and expenditure, prepare a budget just like you did when a first time buyer, so that when seeking advice you  know what is affordable to pay each month over the extended term.”

She concludes: “Mortgage advisers need to take account of all aspects of debt repayment, not just alternative mortgage offers but the impacts of taking funds out of pensions or other savings and for older borrowers the full suite of equity release and lifetime mortgages.”

Mortgage Solutions’ Marketwatch experts recently discussed how they were advising clients with maturing interest-only mortgages, given the growing forecasts of maturing customers.

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