According to the regulator, there are now less than one million outstanding interest-only mortgages, with the number having halved since 2015.
Despite this fall, a significant number of borrowers are still making use of this form of mortgage and will be likely concerned about the changes in interest rates of late because they could be squeezed dramatically by the rate hikes we have seen.
Feeling the effects
Like other borrowers, those with interest-only deals will have seen significant rises in their monthly payments recently. They will be facing the same dilemmas over continued increased monthly payments, if they’re on a variable rate deal, or an uncomfortable prospect of what will happen once their fixed rate comes to an end.
Moreover, the cost of living crisis has only exacerbated any pressures on arranging a repayment strategy. Household finances are under ever greater strain, leaving little wriggle room if the borrower is trying to save money to help repay that capital when their mortgage term comes to an end.
It’s putting these borrowers in a difficult position.
Exploring flexible options for residential borrowers
There are certain solutions that may appeal to the borrower, but whether they are really an option will come down to the attitude of the lender.
For example, the borrower might prefer to extend their mortgage term further into retirement, but this may not be possible if the lender takes a particularly rigid approach to later life lending.
Perhaps the most straightforward and simple option is just to downsize as the repayment strategy, but this might not be acceptable to the lender either. There will be some borrowers who are more than happy to downsize at some point, just not yet.
That need to put off downsizing can present an issue if the deadline for their existing interest-only loan is nearing. At Mansfield, we have helped a host of borrowers in this position through our interest-only with downsizing product, effectively building that future plan to downsize into the assessment.
Looking to RIO
Another similar option for later life borrowers, at least in theory, are retirement interest-only (RIO) mortgages.
I say in theory because we know from our discussions with brokers that there are understandable concerns around the way that affordability is calculated with RIO mortgages. Particularly the fact that these deals are typically stress tested against each income individually when the mortgage is being taken out on a joint basis.
When one member of the couple has a much smaller pension income than the other, that can play havoc with the sums that can be borrowed through such a mortgage, making it less practical as an option.
Again though this comes down to the attitude of the lender.
Seeing the people beyond the profile
The situation with interest-only borrowers and the limited options they can face as they age really highlights the restrictions that arise from the automated models used by some lenders.
We believe it’s better to look beyond the rigid pigeonholes of certain lending types to focus on a more personable ‘can do’ approach to offer lending solutions for brokers and their clients.
Seeking out flexible lenders when working with older clients can pay real dividends and identify practical options that can truly make a positive difference.
Later life lending does not need to be as restrictive as some within the lending industry have made it. It’s important for brokers to recognise lenders who embrace a versatile approach and provide solutions which work for older borrowers with unconventional needs.
