One year after the financial watchdog changed its rules to allow thousands of retired borrowers to extend their interest-only mortgages, This is Money can reveal that the initiative has failed spectacularly.
Figures obtained from the Financial Conduct Authority via a Freedom of Information Act request show that just 112 retirement interest-only mortgages were successfully completed across the whole of the UK last year.
This is despite some 185,370 retirees potentially facing losing their homes as their interest-only mortgages mature.
Just 14 retirement interest-only mortgages were sold in the third financial quarter of last year
In March last year, the FCA relaxed its mortgage lending rules because it was worried about the number of older borrowers who took interest-only mortgages before the credit crisis and now have no way of repaying them without selling their property.
At the time, the regulator predicted that by 2021 around 21,000 retirement interest-only mortgages would be sold annually to help these older homeowners, representing around £1.7billion in sales.
However, today’s data shows just 14 retirement interest-only mortgages were approved between July and September last year, while 98 were approved in the final three months of the year.
What is a retirement interest-only mortgage?
Put simply, a retirement interest-only mortgage is like a standard interest-only remortgage that can be taken into retirement, and which can be paid back once the home is sold, the homeowner dies or goes into full-time care.
They’re generally only available to over-55s, but unlike some equity release products the interest is paid off monthly, so it doesn’t roll up and eat into the equity the homeowner already holds.
When applying, homeowners don’t have to prove they have a credible repayment plan in place, as they would with traditional interest only-deals, instead only having to prove they can keep up with the monthly repayments.
Crucially homeowners can switch onto these deals from existing interest-only mortgages that could be near maturation without a plan in place to pay off the loan.
Why did the FCA change the rules?
The problem has been bubbling under the surface for some years.
The watchdog became concerned several years ago about the number of retired homeowners on interest-only mortgages with no repayment plan.
Interest-only mortgages allow borrowers to pay just the interest on their loan every month.
This makes monthly payments cheaper, but means the borrower has to find the money from elsewhere to pay off the mortgage once it ends.
This type of deal hit the height of their popularity in the noughties, when mortgage lending went into overdrive. By 2007, a third of all mortgages being taken out were interest-only.
Originally, they were designed to be sold with endowment policies, a type of investment product designed to grow over the same term as the mortgage, providing a lump sum with which to repay the mortgage at the end of the term.
However, endowments have typically failed to deliver the expected returns leaving borrowers with a shortfall, and from the mid-1990s until the crash, lenders didn’t require an endowment at all.
Instead, interest-only became increasingly popular for home buyers struggling with affordability.
According to the FCA’s own data, those aged 65 and over with a mortgage are significantly over-represented when it comes to interest-only mortgages.
They make up one in nine of all interest-only mortgage holders, whereas overall they are just three per cent of the mortgage holding population.
These older borrowers are in a particularly difficult situation as previously affordability rules stopped them from moving to a better deal, meaning once their mortgage terms were up their only option was to sell their home and hope they had enough equity to fund the purchase of a smaller property.
This left thousands of borrowers in a really tricky position – unable to repay their loan, remortgage and afford to downsize.
Many retired prisoners are unable to repay their loan, remortgage or afford to downsize
The watchdog thought it had cracked the issue when it relaxed its affordability rules last March, allowing lenders to lend interest-only into retirement indefinitely.
This came following sustained public pressure and media reports, such as our report last year which highlighted Len and Val Fitzgerald, pictured above, who were being taken to court by their lender at 76 after they were refused an extension when their loan matured.
Under the new rules, the property would be sold on the death of the borrower to repay the loan, meaning the borrower would never have to worry about moving out of their home.
Why aren’t lenders offering retirement interest-only?
The changes this time last year led to a flurry of new mortgage deals being released by building societies around the country.
To date, 12 different providers have launched 38 different retirement-interest only products.
Bath, Leeds, Loughborough, Mansfield, Marsden, Newbury, Tipton & Coseley, Vernon and Scottish building societies, Post Office, Hodge and Shawbrook all offer retirement interest-only deals.
Lenders such as challenger bank Aldermore also offer interest-only mortgages into retirement, but as the terms are fixed they don’t technically count as retirement interest-only mortgages, which by definition are termless.
But with just 112 deals completed in 2018, this averages out at just 10 deals per lender over a full year.
There are 1.67million interest-only and part capital repayment mortgage accounts outstanding
According to the FCA, there are currently 1.67million full interest-only and part capital repayment mortgage accounts outstanding in the UK.
They represent 17.6 per cent of all outstanding mortgage accounts and over the next few years increasing numbers will require repayment.
If, as the FCA says, one in nine is a retired borrower, that means there are roughly 185,370 retirees with interest-only mortgages in place.
Some of these will have repayment plans in place, but many of them won’t.
What’s gone wrong with RIOs?
A retirement-interest only mortgage differs from a standard interest-only mortgage in that the lender will be repaid when the borrower dies, or in joint cases, upon the death of the last surviving borrower.
They can also be repaid when the last borrower leaves the property to live elsewhere, for example by moving into residential care.
As part of this, the mortgage must be affordable on what is called an individual ‘sole survivor basis’.
For example, where a couple takes a loan, both partners must be able to show they can afford the mortgage payments on their own in the event that one partner dies.
Mind the advice gap: Is this the next big mis-selling scandal?
Not all of the brokers selling retirement interest-only mortgages can advise on equity release, and this is a cause of rising concern for some.
Advisers for lifetime mortgages need specialist equity release qualifications, while retirement interest-only mortgages don’t.
Without an equity release qualification, an adviser can point the borrower in the direction of other products – but can’t advise on them.
Equity release adviser Andy Wilson
Many are worried that this may lead to some later life borrowers taking an unsuitable product when there could be better options available.
Independent mortgage and equity release adviser Andy Wilson said: ‘Older borrowers are deemed by the regulator to be “vulnerable persons” and need to be advised cautiously and properly. We need more advisers qualified and practising in equity release.
‘Without requiring retirement interest-only advisers to also compare the products with possible lifetime mortgage outcomes, we will surely face complaints of mis-selling and a media storm when misled old age pensioners start to have their houses repossessed.
‘That’s a throwback to the late 1980s that nobody wants to revisit.’
This is where a large part of the problem comes in.
Bath Building Society’s Tiffany Hardie-Albutt described the way the society assesses affordability on retirement interest-only deals: ‘Because of the long-term nature of the rate we have to consider the possibility that one of the applicants might pass away during the agreed mortgage term.
‘We also only use income such as state pension, private pensions, investment income and rental property income.
‘No earned income is allowed. So we conduct two assessments first on a joint basis with all the applicable income then a second on the youngest applicant including any income that might transfer to them if their husband or wife passes away.’
This is a fairly typical way to assess affordability for a retirement interest-only; This is Money asked Mansfield, Hanley, Nottingham, Scottish and Ipswich building societies, which all had similar processes.
On joint applications it is the lowest income that matters. It’s that income that would need to be used to make the monthly payments should the person with the higher income die first.
These stringent criteria can make the deals unavailable to the borrowers that need them most.
So far the deals on offer are also only at lower loan-to-values, excluding borrowers who don’t already have a substantial amount of the equity in their homes paid off.
Hanley Economic currently offers the highest loan-to-value retirement interest-only deal, at 65 per cent LTV, meaning borrowers need to own 35 per cent of their property outright to qualify.
Complex income
The underwriting process is also more complicated than a traditional mortgage for this type of deal.
The lender has to factor in pension income, investments, and other forms of income, plus the possibility of the death of one of the borrowers.
This makes it hard for lenders to process a lot of these applications at once. This is Money heard reports of building societies even setting up specialist credit assessment panels where a board would discuss applications on a case by case basis.
John Charcol technical manager Nick Morrey
Broker John Charcol’s product technical manager Nick Morrey said: ‘The deals themselves are not particularly inspiring or cheap.
‘There are very few longer-term fixed rates available to provide the security that is often sought by people borrowing through 70 years of age and beyond.
‘In fact, many products are less than five years, requiring a rate switch or even a remortgage every few years – not necessarily what these borrowers would like.
‘Underwriting can be a tricky too. Affordability calculations and stress tests assume that the payments must be made after the major income earner has passed away.
‘Therefore, the income used is what is remaining to the second applicant and that amount could be significantly lower – possibly low enough to make it unaffordable.’
What has the watchdog got to say?
This is Money asked the FCA to comment on the fact that lenders had failed to deliver enough retirement interest-only mortgages to borrowers who need them.
The regulator declined to say anything on the figures.
However, late last year, the FCA’s executive director of strategy Christopher Woolard gave an update on the watchdog’s view of the mortgage market.
‘As a regulator, we are squarely behind the development of innovative products that meet the changing needs of consumers,’ he said.
‘We introduced new rules this year to allow for greater consumer access to retirement interest-only mortgages.
‘As more people live longer lives, it will become ever more important that the market evolves to accommodate the particular requirements of an older population.’
Documents reveal FCA never expected many lenders to offer retirement interest-only deals
However, in documents published before the rule changes came into force, the FCA admitted that it envisioned only a few lenders offering these types of product once the new regulations were in force.
‘We expect only a small proportion of mortgage lenders will look to sell retirement interest-only products,’ the watchdog said in an assessment of the changes.
‘We expect that those with a significant interest-only back book will be most likely to sell these products.
‘Using internal FCA sector knowledge of the mortgage sector, we estimate that there are 12 mortgage lenders with a significant interest-only back book or an interest in lending to older borrowers.’
Even given the small number of lenders predicted to enter the market, the documents show the watchdog thought there would be tens of thousands of retirement interest-only mortgage sales in the coming years.
‘The firms interested in lending indicated that they would make increasing amounts of sales up to 2021/22 with around £1.7billion in sales,’ it said.
‘We would expect around 21,000 sales per year of retirement interest-only mortgages from 2021/22.’
This is Money Campaign: End the commission bias that is hurting older homeowners
Sarah Davidson, of This is Money
Sarah Davidson, of This is Money, writes
The problem of what to do with the thousands of UK homeowners stuck on interest-only mortgages they have no practical way of repaying has loomed over the industry for more than a decade.
The so-called ‘ticking timebomb’ was bad back in 2008 when lenders reined back lending on interest-only terms; it was made a lot worse in 2014 when new rules banned lenders from accepting the sale of a property as a means of repaying interest-only mortgages.
Last year, the regulator accepted those rules couldn’t be allowed to continue and an exemption was made.
Retired borrowers would be allowed to remortgage interest-only loans (or take new ones) providing they could afford to meet the interest payments.
The property would be used to repay the outstanding debt when the borrower died or moved into full time care.
It was heralded as a game-changer. Finally, help was at hand for more than a hundred thousand pensioners, whose anxiety at losing their homes must have been almost unbearable.
But today’s numbers show just how appalling a failure it has been.
A dozen lenders between them have helped just 112 retired homeowners to get an interest-only deal in a year.
To put that into context, 50,400 mortgages were given just to people moving to a new home in January.
This is a disaster. And it risks ruining the public’s perception of the help that could be available to them.
Why has it happened this way?
Three basic reasons.
1. Lenders don’t really know how to assess whether or not borrowers can afford to repay until they die, especially if the income comes from investments, pensions, beneficiary pensions – this is REALLY hard to get right.
2. Lenders don’t really want the risk of older borrowers failing to keep up with their mortgages on their balance sheets – they have little incentive to do this type of lending themselves.
3. Mortgage brokers don’t really understand it and equity release brokers don’t really want to sell it.
This first one should iron itself out in time as lenders get used to underwriting more complex incomes.
The second one is more of a hurdle: why would lenders remortgage existing interest-only borrowers onto a new, cheaper loan and cause themselves a massive headache assessing their ability to afford to repay it while eating into their own profits?
Most lenders want these borrowers on variable rates, making them a profit, or off their books and away to another provider.
This is Money campaign for change
End the commission bias on retirement mortgage advice
The third is the biggest problem and it’s one the FCA must address soon.
There is a massive commission bias creating an advice gap. Mortgage brokers and equity release advisers both earn commission from lenders when they successfully complete a mortgage application for a client.
Mortgage brokers get paid somewhere in the region of 0.35 and 0.5 per cent of the mortgage amount when completing a retirement interest-only mortgage. On a £100,000 loan they’d receive £350 to £500.
Equity release brokers are also paid commission, but they get a whopping 3.5 per cent of the loan amount. On a £100,000 loan that is £3,500.
The basic principle behind giving mortgage advice is to help the customer get the best solution to their problem.
But, the adviser has to have permission from the regulator to tell clients if that’s either a retirement interest-only mortgage or a lifetime mortgage, equity release in other words.
Generally speaking mortgage brokers are not qualified to advise on equity release so they refer them to retirement specialists.
It’s therefore equity release advisers who are in the best position to tell customers whether to take a lifetime mortgage or a retirement interest-only mortgage.
Therein lies the problem.
It is very hard to argue there is no commission bias for the adviser if by recommending a retirement interest-only mortgage to the customer they earn £500 but by saying you should get a lifetime mortgage, they’ll pocket £3,500.
The rates on retirement interest-only are not cheap at the moment either, so cost-wise, if you’re comparing lifetime mortgage costs where you choose to pay your interest every month with a retirement interest-only deal, there’s probably not much in it.
Until, that is, you start to roll up interest and compounding eats into the value of your equity .
While the FCA has kept schtum on what it thinks about the low take-up of retirement interest-only mortgages in their first year, it is likely it’s quietly apoplectic that this is how things have played out.
They must address these issues, and soon, for the sake of thousands of perfectly respectable retired homeowners in the position they are because of poor lending practices out of their control.