Older borrowers stuck on interest-only mortgages have been offered what could become a lifeline by Britain’s biggest building society Nationwide.
The lender is the first major mortgage provider in the UK to launch a retirement interest-only mortgage, initially allowing its existing customers to extend their interest-only loans well into retirement.
Retirement interest-only mortgages are aimed at those who have failed to clear their debt before stopping work and those who would like to cash in on their home’s value to help fund their pension years.
While currently a niche product, their popularity is expected to grow substantially in years to come, rivalling equity release.
Last year the FCA changed its rules to allow retirees to remortgage onto interest-only deals
Last year the financial watchdog changed its rules to allow thousands of retired borrowers to remortgage onto interest-only deals without needing a repayment plan in place. Instead, they are allowed to use the sale of their home on death or moving out into full-time care to repay the balance.
But despite this rule change, the mortgage industry has been slow to act and only a handful of small building societies are offering the deals.
Last month, This is Money revealed that only 112 of these types of mortgages were sold across the whole of the UK in 2018.
This is despite potentially tens of thousands of pensioners having no repayment plan in place for their existing interest-only mortgages, meaning many could lose their homes once their deals mature.
With Nationwide becoming the first of the ‘big six’ lenders to launch – albeit on a limited basis to start with, in theory this could help to make this type of mortgage more widely available to those who need them.
David Hollingworth, of mortgage broker L&C Mortgages, said: ‘The move by Nationwide to develop a broader range of mortgage options for older customers is a significant one.
‘Retirement interest-only mortgages have been slowly growing in number as more lenders have begun to offer products but this marks the first launch by such a big high street player.’
The announcement comes alongside the release of a range of Nationwide later life lending products, which also includes a retirement capital and interest mortgage – allowing homeowners to start to pay off their outstanding balance slowly – and a lifetime mortgage equity release product.
Initially these deals will only be available to existing Nationwide mortgage members, but the society plans are to roll out the deals more widely this summer.
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 they have to prove they can keep up with the monthly interest repayments.
With some lenders, 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.
How does it compare?
Currently Bath, Beverley, Ipswich, Leeds, Loughborough, Mansfield, Marsden, Melton, Newbury, Nottingham, Saffron, Scottish, Tipton & Coseley, and Vernon building societies, and Shawbrook Bank all offer retirement interest-only deals.
Lenders such as Aldermore and Post Office 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 don’t have a fixed end date.
The majority of retirement interest-only deals are offered by smaller building societies and some are postcode restricted.
Currently Nationwide’s retirement interest-only deals are only available up to 50 per cent loan-to-value. These include a two-year fix at 2.99 per cent, a five-year fix at 3.19 per cent, a 10-year fix at 3.79 per cent, and a two-year tracker, currently at 2.74 per cent.
Applicants must be Nationwide mortgage members over 55, both if joint, and can apply up to age 85. There are no product, valuation or advice fees.
As of the time of publication Nationwide’s fixed rate retirement interest-only mortgages are the cheapest on the market, but you’ll have to already own at least 50 per cent of your home outright to qualify.
By comparison the biggest lender to offer retirement interest-only deals after Nationwide, Leeds Building Society, offers a two-year fix at 3.34 per cent, with a £999 product fee, available up to 55 per cent loan-to-value.
It also offers a five-year fix at 3.62 per cent with a £999 fee up to 55 per cent loan-to-value, and a 10-year fix at 3.99 with the same fee up to 55 per cent loan-to-value.
Nationwide’s offering is markedly cheaper, but you’d need 5 per cent more home equity to qualify than you would for Leeds’ deal.
Nick Morrey, of broker John Charcol, said: ‘There is still work to be done in this market as older borrowers can often have complicated scenarios and income streams that underwriters and policies need to be able to accommodate.
‘The more lenders that enter this market the better to encourage diversity and innovation as well as driving down products to closer match standard residential offerings.’
Are retirement interest-only mortgages any good?
Despite much fanfare when the watchdog relaxed the rules, in its first year the retirement interest-only initiative failed miserably.
Just 112 were sold, despite some 185,370 retirees potentially facing losing their homes as their existing interest-only mortgages come to an end.
At the time of launch, 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.
Last year’s results indicate this target is a very long way off being met.
But could a large lender like Nationwide entering the market potentially help bolster these numbers and make this type of deal more widely available?
Later life mortgage adviser Andy Wilson
Independent mortgage and equity release adviser Andy Wilson is sceptical.
He said: ‘The availability of products is currently pretty limited, but it’s not their availability that it is the main issue with these plans, It is the ability of the potential borrowers to afford the payments for the rest of their lives.
‘Lenders are naturally cautious in considering who can reliably afford their products, as repossessing old age pensioners for non-payment can only ever result in a media storm and bad press all round.
‘I do believe the number of providers offering retirement interest-only mortgages will increase, possibly including some of the large high street banks, but the issues with the products will always surround affordability.’
End the commission bias that is hurting older homeowners
Last month This is Money revealed that just 112 retirement interest-only mortgages had been sold across the whole of 2018.
One of the reason take up has been slow is a commission bias between retirement interest-only mortgages and other later life products.
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 most of the time, mortgage brokers are not qualified to advise on equity release so they refer them to retirement specialists.
This is Money has previously called on the Financial Conduct Authority to address this issue and help close the commission gap.