This week Mortgage Solutions asked our experts how they are advising maturing interest-only customers?
Simon Collins, product technical manager at John Charcol, notes that many lenders are offering hybrid interest-only and capital repayment products to ease the shock.
Lea Karasavvas, managing director of Prolific Mortgage Finance, highlights that many lenders now accept incomes up to age 75, recognising the practice of working longer.
Luke Northcott, senior adviser at Capricorn Financial fears there will be some clients who find themselves in real trouble but most clients will have enough equity to downsize if required.
Coming to the end of your mortgage should be a time to celebrate, however, if you have an interest-only loan, with no repayment vehicle in place to pay it off, then as that end date approaches you are going to be feeling very vulnerable.
Whenever interest-only clients have looked to remortgage we have discussed their options to repay the loan, and wherever possible, have moved at least some of the balance onto capital and repayment.
The fact that many lenders now offer 50% interest-only with up to 25% topped up on repayment has certainly helped many borrowers to do this, and negated the payment shock of going to a full repayment.
Another issue that has caused problems has been the advancing age of borrowers, with many in their late 40s and early 50s thinking they would struggle to get a 25-year term as typically high street lenders were capping it at 70 or whenever they planned to retire.
Shifting their mortgage on to a repayment basis over say a 15-year term caused problems in trying to meet many lenders’ affordability calculators.
However, having more than 25 building societies who will lend up to a maximum age of 85 is a massive boost to those interest-only borrowers approaching the end of their term, and who thought that their only options were to sell or look at equity release.
Although the thought of having a mortgage going into later life may not be too appealing, it does at least give them some options.
With so many maturing interest-only mortgages coming up, there is a major problem on the horizon, but we are already seeing some viable solutions that need to start spreading further in the industry to avoid a flooding of property on the market and a serious issue for older borrowers.
Most of the maturing mortgages are for clients where mortgages were maturing at age 65 as retirement ages would have been lower when they were taken out.
With many lenders now accepting employed incomes as well as self-employed income up to age 75, this means that 10-year mortgages are available for people coming off an interest-only mortgage. The only issue here is that a 10-year repayment mortgage is going to be considerably more expensive than an interest-only mortgage and the stressing of these mortgages mean it may not fit affordability calculators.
However, providers such as Hodge Lifetime and Family Building Society to name but a few mean that options are available to these people to go beyond age 75.
For the right type of client, there are also other options with more niche lenders, but the profile must be right.
There could also be a huge uplift in equity release mortgages but my advice would be that all options are explored before pursuing this route as there are plenty of lenders that will still allow a more mainstream solution before the likes of equity release can be considered.
As a primarily London-focused business, we find very few clients in that situation whereby their profession will not allow them to continue working past state retirement age, and thus forcing their hand to redeem their mortgage or find non high-street options.
For the very few clients in that situation, most will typically have a large element of equity in their property whereby downsizing is a viable, and realistic option post maturity.
For those that have recently engaged in the interest-only element of lending, and are not in that position, are in typically well paid professions and can continue to work.
This is because a minimum income requirement is what lenders will have required in the last five to 10 years to provide interest-only lending without standard repayment vehicles such as pensions and endowment policies.
For that small proportion of clients which we come across, there are options out there with a fair few lenders who will engage in interest-only lending up to ages 70 or 75, whereby we can find the client solutions, at least for the short term.
There are clients who will find themselves in real trouble in the coming few years, but in London, most clients will have built up a healthy element of equity to be able to tackle the problem and downsize if required.
We are fortunate enough to not come across that problem often, if at all.