The regulator said brokers should also look to be a part of the conversation with customers, so we asked this week’s Marketwatch panel what the options are for interest-only borrowers and how the market is set to shape up in the future.
Dean Mirfin, chief product officer at Key Retirement, says lender are trying their best to create new options.
Louisa Sedgwick, sales director at Vida Homeloans, wants more details on how retirement interest-only mortgages could work.
Brian Murphy, head of lending at Mortgage Advice Bureau, suggests smaller building societies are producing creative solutions.
The FCA’s market review on interest-only mortgages was billed as a warning for the 1.7m customers with loans which have yet to mature, but lenders have an even bigger role to play.
Customers should act as early as possible but to act they need solutions, which is where the challenge for lenders comes in.
We already know there are too many older customers who have not done anything mainly because their lender does not have a solution to offer.
They can make monthly interest payments but are not able to switch to a repayment loan or to downsize and are left in limbo with the lender unable to offer a solution.
Borrowers and lenders are left waiting to see who moves first.
Lenders regularly show they can offer new solutions in other parts of the mortgage market and there is a real need for new thinking on the interest-only issue.
Equity release has a part to play as some customers can withdraw cash to pay off the loan.
Lenders such as Santander and Co-op Bank are offering advice on it as part of their response; more lenders should follow.
Loans could be rolled over to become lifetime mortgages allowing customers to pay interest on part of their loan if they can afford to.
The FCA is currently consulting on retirement interest-only mortgages and that is very welcome.
Older borrowers, however, need to know now that their lender is trying to help find a solution, but that message is not getting through.
There are nearly 2m borrowers in the UK on an interest-only mortgage but it has been a lot more difficult to obtain one since new regulations were introduced by the FCA in 2012.
Those regulations ensure that such mortgages cannot be sold without a reasonable repayment strategy and resulted in many lenders leaving the interest-only sector.
As a result there are a significant number of people on interest-only deals maturing over the next decade who might not be eligible for an interest-only mortgage because of the more stringent requirements, or be able to afford a more expensive repayment mortgage.
The FCA published a consultation document last September, asking for the industry’s views on retirement interest-only mortgages, whereby older borrowers can remortgage onto an interest-only mortgage without having to show they have a reasonable repayment strategy in place.
But, to date, there has been no public announcement about how the scheme will work in practice.
In the meantime, there are several specialist mortgage lenders who do offer interest-only mortgages to several segments of the market, including borrowers with investments, for example ISAs, or tax-free lump sums from pensions.
Other borrowers may want to live in an expensive area for a short period of time, saving money on renting, before moving somewhere cheaper in the future.
Or they may not want to repay the capital at all, intending to sell the property and move into care or somewhere cheaper later in life.
And, of course, interest-only is still a useful option for buy-to-let landlords.
A number of mortgage lenders, in particular the smaller regional building societies, are now much more accommodating when it comes to offering mortgage products to borrowers in later life.
In some cases, lending is available way beyond normal retirement age, subject to the borrower being able to meet affordability criteria – be that from earned or retirement income, or both.
These products are also subject to loan to value restrictions but can provide more options for some borrowers whose interest-only deals are approaching maturity.
However, for some borrowers whose circumstances maybe preclude them from switching to a lender that can offer lending in or into retirement due to an inability to demonstrate affordability, equity release may be a further option, although again loan to value will be a determinant.
For some borrowers selling their existing property and downsizing may also be an option.
Several lenders are developing retirement interest-only mortgages to potentially provide further options for those borrowers whose existing interest-only mortgages are approaching their end dates, although we believe this area is still the subject of consultation with the regulator.
Borrowers should in all circumstances engage with their existing lender to discuss their individual circumstances and explore any opportunities to extend the mortgage term, to possibly convert some of the mortgage to capital and interest repayment, and to ascertain if the lender is able and or willing to offer any other strategies to ensure a good outcome.
Lenders do not want to repossess properties but borrowers do need to engage with and maintain a dialogue with their lender in order to mitigate this.