Q: As the number of interest-only mortgages reaching the end of their term increases, what place will equity release have in the market going forward?
A: The latest industry figures warned that of the estimated 150,000 interest-only mortgages due to mature each year between 2014 and 2020 around half of which are likely to be in shortfall due to the poor performance (or misguided expectations) of investment vehicles or failure of homeowners to put any repayment vehicle in place.
Although equity release has been suggested as the solution for homeowners in this situation it is not a silver bullet because, in order to benefit from equity release, clients need to have sufficient equity built up in their property in the first instance.
Those with mortgages ending before 2020 are most likely to be eligible because, as a result of rising property values during the 80s and 90s, these homeowners are most likely to have built up a significant amount of equity within their property. Those with interest-only mortgages that end later are less likely to be eligible. This is because, as the property market continued to boom during the late 90s and 00s, lenders started to lend at higher LTVs.
Whilst property prices have risen in the last decade, the UK property market has been relatively stagnant meaning that this tranche of homeowners are unlikely to have seen a enough equity in their property unless they are eligible for higher LTVs because they can afford to pay some or all of the interest or are suffering health problems that reduce their life expectancy.
It would be remiss of me to ignore the fact that consumer confidence does appear to be returning and house prices across the UK continue to rise. Of course, if property values increase dramatically over the next few years, then equity release will be a viable solution for a greater number of homeowners.
Property is often the largest asset someone has when they reach retirement, especially if they have lived there for quite a while. In recent months key policy makers have become wise to this and equity release has since been proposed as the remedy for numerous challenges, including the funding of retirement for an ageing population.
However, if a mortgage holder intends to use equity release to repay an existing mortgage when they retire it is important they assess whether they are on track to have enough capital built up in their home to fund their plans. Those mortgage holders who are still quite a way off retirement really should contact their lender and look at the repayment options available that may enable them to boost the cash in their home so that they can benefit further down the line.
