Pensioners stuck with interest-only mortgages and homeowners looking to help children or grandchildren on the property ladder could be offered a new wave of home loans.
Lenders are gearing up to offer retirement interest-only mortgages after the financial watchdog delivered on a promise to relax strict lending rules.
These mortgages would help those unable to clear interest-only debts, needing to take out mortgages to move in retirement, or even wanting to pass on an early inheritance.
Unlike most existing equity release products, such mortgages would prevent debts from rolling up and eating into a property’s value by allowing borrowers to pay off interest.
A change to lending rules man that it should now be possible to use the sale of your home as the way you plan to repay interest-only
The launch of such mortgages on a widespread scale would radically shake up lending in retirement, enabling people to more easily borrow against their property’s value. However, it is also likely to trigger concern over a fresh bout of mortgage debt.
Post Office has just unveiled the market’s first retirement interest-only mortgage, suitable for borrowers taking a new mortgage, but not those looking to remortgage an existing interest-only loan.
Meanwhile, Family Building Society is the first lender to confirm plans to launch an interest-only mortgage for those needing to remortgage in retirement, with the lender expecting to be ready around September this year.
Early indications suggest that it could offer two options to borrowers looking to remortgage an existing interest-only loan: a long-term variable rate, allowing flexible repayments, and a combination of fixed rates spanning three years, five years and potentially longer terms.
Rival lender One Savings Bank has also confirmed it is keen to offer the loans at some point in the future, with chief executive John Eastgate saying the lender is in ‘early stage discussions’ about product design and funding options.
He said: ‘The recent change to regulation is genuinely to be welcomed and opens up opportunities both to help those needing to remortgage existing interest-only mortgages and older borrowers looking to free up some of their wealth to pass on to the next generation.
I can see interest-only in retirement helping expand the Bank of Mum and Dad and Granny and Grandad
John Eastgate, One Savings Bank
‘I can see interest-only in retirement helping expand the Bank of Mum and Dad and Granny and Grandad, especially where they have a lot of equity in their homes and a desire to help kids and grandchildren onto the property ladder before they die and an inheritance is passed on.’
This is Money understands several other smaller lenders are also engaging in discussions ahead of plans to launch the deals in early 2019.
Lending into retirement on interest-only mortgages disappeared from the market several years ago after European mortgage rules made it virtually impossible for lenders to offer them.
But there is a sizeable chunk of people retiring with mortgage debt outstanding. Late last year the Britain’s financial watchdog published research revealing that there are currently 1.67 million 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.
Furthermore, the FCA found that 70 per cent of all interest-only and part capital repayment mortgages are held by customers aged over 45.
And the proportion of 45 to 54-year-old mortgage holders with an interest‑only residential mortgage is higher than for all UK adults at 15 per cent compared with 11 per cent.
According to the FCA’s own data, those aged 65 and over with a mortgage are also 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 3 per cent of the mortgage‑holding population.
It’s understood that the number of people who have no idea how they’ll be able to repay these mortgages could run into the hundreds of thousands, with many of them older and financially vulnerable.
Young families looking to get on or move up the housing ladder could get a leg up from their parents or grandparents using a new breed of retirement interest-only mortgages
What’s changed on mortgages in retirement?
In September last year the Financial Conduct Authority put the European rules under review, admitting they had created a barrier for thousands of credit-worthy retired In borrowers.
In order to qualify for an interest-only mortgage, borrowers had to be able to show they have a credible capital repayment strategy, such as savings, investments, another property or enough equity in their home to fund downsizing.
Selling their home to repay the mortgage when they died or moved into full-time care was ruled out.
This meant that even when retired borrowers were comfortably meeting their interest payments each month, they couldn’t extend their mortgage term if they were ultimately relying on the sale of their home to repay the debt.
Some people are really struggling when they come to the end of their existing term and find their lender won’t extend the term, instead demanding that they sell up to repay the capital
Keith Barber, Family BS
Following its review, the FCA relaxed these rules at the end of March this year, meaning this repayment method can now be accepted by lenders.
Keith Barber, of Family Building Society, said: ‘There is patently a need for retirement interest-only mortgages to come back into the market – especially for those who need to remortgage an existing loan.
‘Some people are really struggling when they come to the end of their existing term and find their lender won’t extend the term, instead demanding that they sell up to repay the capital.
‘While the finer details of our retirement interest-only mortgages are still being considered, we are confident that we’ll be able to offer these borrowers a flexible option that works for them and helps them in their retirements.’
What is already on offer?
Borrowers hoping to renew an existing interest-only mortgage in retirement will have to hold on for a few more months, until Family BS launches its products.
However, Post Office has launched a mortgage aimed specifically at helping retired borrowers who want to take an interest-only mortgage rather than do equity release.
The lender said the launch of the deal – known as Retirement Link – was not in response to the recent rule change by the lender, which could be why it’s only available to borrowers taking a new loan out.
To apply, you must own your home outright and have no mortgage.
There are two options available – a five-year fix up to 50 per cent loan-to-value at 3.18 per cent for those looking to switch to capital repayment deal.
And a five-year fix up to 30 per cent LTV, also at 3.18 per cent for those looking to stay on interest-only.
Both deals have a maximum loan amount of £500,000, are fee-free and come with a cashback offer of £750 to pay for legal fees.
To qualify for the repayment deal, you’ll have to be over the age of 55 and able to show that you can repay by the age of 90 and for the interest-only version, that you’ll repay by the age of 80.
Owen Woodley, chief executive of financial services at Post Office, said: ‘One of our key objectives was to provide a viable alternative to equity release. These deals allow customers to access equity in their unencumbered homes via a mortgage that is paid from their pension income.
‘This gives customers the opportunity to live the life they want, for example undertaking home renovations, gifting a deposit to a child or grandchild or taking the holiday of a lifetime.
‘The mortgage can either be taken as a capital repayment or interest-only so unlike most equity release loans their debt will not increase over time which, for some, could be real benefit.’
When applying for a retirement link product the borrower doesn’t need to see an equity release adviser, although they will need to see a financial adviser.
Andrew Montlake, of mortgage broker Coreco, said: ‘It is good to see a mainstream lender and a trusted brand providing exactly the type of product that is needed for those older borrowers who are able to continue servicing a mortgage and who do not want, or are unable, to sell their existing property and move on.
‘Extending the age limits to 90 on a repayment basis and 80 on an interest-only basis gives borrowers in this sector a real option to a potentially more expensive equity release loan that will eat into their equity.’
For more on the difference between taking an ordinary interest-only mortgage in retirement or whether you might be better with a lifetime mortgage or equity release. Read our full guide here.
Interest-only Mortgage Timebomb Calculator
This calculator shows borrowers with no plan to repay an interest-only loan, or whose investments have fallen short, how much extra you may have to find if your lender forced you on to a repayment mortgage.