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Diffusing the interest-only time bomb

by: Chris Prior
  • 06/11/2012
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Diffusing the interest-only time bomb
Much has been made recently of the number of older homeowners with interest-only mortgages heading into retirement with no repayment vehicle in place, but unfortunately this only represents part of the problem.

It is undoubtedly one of the most pressing concerns facing the mortgage industry with lenders and borrowers alike are anxious that the home loan is repaid in full, but individuals on repayment-type mortgages aren’t exempt from the problem.

There seems to be have been a worrying increase in the number of pensioners saddled with all different types of debt into retirement recently and research from the FSA suggests the problem will only get worse in future years.

The FSA’s findings show that one in four mortgages sold in the past seven years will last into the borrower’s retirement which naturally raises questions about how these loans will be serviced once incomes are reduced in retirement. Of these mortgages, three-quarters are due to be repaid by the time the borrower reaches 70 years old, but an alarming 5% are set to last beyond the borrower’s 80th birthday.

This concerning trend is storing up trouble for a later date and shows that while lenders may have tightened up their criteria in the here and now, there are some considerable potential problems further down the line.

Of course, borrowers aren’t completely exonerated of any responsibility here and it is no longer an excuse to plead ignorance. We’ve seen from the recent Mortgage Market Review (MMR) final rules and feedback that while the regulator is keen to keep lenders in check, it is also adamant that borrowers accept accountability too.

In the past there has clearly been a buy now, pay later mentality that was happily accepted by both borrower and lender alike. It is because of this that the equity release sector should prime itself for a growing number of older homeowners facing financial trouble as their retirement looms. In 2011/12, Bridgewater found that 32% of applications were to repay a mortgage.

Even if the mortgage or debt repayments aren’t taking up a significant part of individuals’ income, there may be a resentment that they are still servicing such loans and there may be a desire for more disposable funds.

The MMR may have the intention of preventing the mortgage market from returning to its previous lending practices, but you can be sure there will still be individuals finding themselves in a tight spot, sometimes through no fault of their own. Either way, equity release may provide a viable and suitable solution for those finding themselves in such a situation.

Chris Prior is manager of sales and distribution at Bridgewater Equity Release

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