Co-op interest-only borrowers offered equity release

The Co-operative Bank has struck a deal to offload customers over the age of 55 who have interest-only mortgages but cannot afford to repay them.

The mutually owned bank has teamed up with Legal & General Home Finance to offer older interest-only borrowers a lifetime mortgage or equity release as a way to repay their existing loan. 

The tie-up will initially be offered to borrowers approaching the end of their mortgage term and who have no feasible way to pay off the bulk of their loan.  

However, the option to repay interest-only mortgages through a lifetime mortgage from L&G will also be on offer to borrowers over the age of 55 who simply want to stop their monthly payments in favour of having more spending money.

The cost of switching to a lifetime mortgage is that monthly interest will roll up into the loan, eating into the equity homeowners have in their properties over time. 

Defending the decision, Matthew Carter from Co-op Bank said the deal would provide ‘an alternative and sustainable option’ for the bank’s interest-only end-of-term customers who are approaching, or in, retirement.

‘We look forward to working with Legal & General Home Finance to help more of our customers create a better, more secure, retirement, through increasingly effective ways of managing their finances in later life.’

Co-op isn’t the only bank to offer lifetime mortgages to older interest-only borrowers with no savings to repay their home loan. 

In July last year, Santander struck a similar deal with L&G to help get borrowers off interest-only terms and into a lifetime mortgage instead. 

Steve Ellis, who runs Legal & General Home Finance, said: ‘Accessing property wealth for later life is a concept that is rapidly growing in popularity amongst Britain’s over-55s.

‘There are still a significant number of borrowers who have not set aside the necessary funds to repay the outstanding capital once their interest-only mortgage matures, and a lifetime mortgage could be one solution for these individuals. 

‘With two of these partnerships now under our belt, Legal & General Home Finance will continue to explore the possibility of more agreements of this type, to help these borrowers to manage their interest-only mortgage and get the most out of later life.’ 

What’s on offer? 

Under the new agreement, Co-operative Bank customers over the age of 55 with interest-only mortgages will be offered the option of speaking to an independent adviser who will be able to show them what switching to an L&G lifetime mortgage will mean for them.

Lifetime mortgages are a type of equity release. Essentially this is a loan much like a mortgage but instead of paying interest monthly to your lender, this interest is charged and added to the outstanding mortgage balance. 

Over time, this means your balance gets bigger and interest is charged on the larger balance. 

Equity release has been widely criticised in the past but in recent years rates of interest have fallen. Typical variable rates are now around 4 per cent.

It’s also possible to make no interest payments each month or elect to make voluntary or regular monthly payments if you are concerned about the roll-up of interest.

You have the right to live in your home until you die, at which point the lender will recover money owed from the sale of the property.

How does it compare?  

Customers will be offered advice by equity release experts The Retirement Lending Advisers, which is part of Key Retirement Solutions. 

TRLA can only give advice on Legal & General lifetime mortgages but if the products Legal & General offers are not suitable, the customer will instead be referred to Key Retirement Solutions, which looks at the whole equity release market.

Co-operative Bank’s interest-only customers will not be charged an advice fee and those who do decide to take out a lifetime mortgage won’t pay any valuation or arrangement fees.

Legal & General is a relatively new player in the equity release market but it’s already one of the biggest and it does offer some of the cheapest rates around. 

There are other providers though, some of which offer more flexible terms – so it is definitely worth shopping around or asking your adviser if a deal from a different provider would suit you better. 

There may also be options other than equity release if you have an interest-only mortgage you can’t repay. 

Many of the smaller building societies in the UK have raised the maximum age they’ll lend to you over the past 18 months, with a good selection lending up to the age of 85. 

If you can afford to keep making monthly payments, this could be a cheaper option if you can afford to switch to part interest-only part capital repayment as you’ll be gradually paying off the outstanding balance and reducing your debt. 

There are also some interest-only loans designed specifically for older borrowers. Hodge Lifetime has made a point of specialising in this sort of loan. 

This is Money verdict 

It might feel unfair that Co-op wants to get rid of its older customers with interest-only mortgages but sometimes you need to face facts. 

Those who took interest-only loans out before the 2008 financial crisis got fantastic deals and didn’t have to have a plan in place for how they planned to pay off their mortgage balance when the term came to its end. 

For many of them, it meant they could afford to buy far bigger properties than if they’d had to take a capital repayment mortgage. 

But the banks made these loans before the world and financial regulation changed and now homeowners face some tough choices. 

Whether you decide equity release is right for you or not, the very best thing to do is speak to an independent financial adviser who specialises in helping older homeowners. 

This is Money has partnered with Key Retirement Solutions as we consider their approach to be balanced. You can find out more about it here. 

If you are referred to Key Retirement by the Co-op, it’ll only consider L&G loans for you. If you go to it directly, it’ll look at other providers too. 

While there are several financial options to deal with an interest-only mortgage that’s ticking closer to payday, you may actually find that selling up and buying a smaller home may be the most affordable thing to do. 

A good adviser will talk you through all the options available.