Retirement interest-only mortgages flop with just 660 sold

A new type of retirement mortgage designed to help fix the interest-only time bomb has completely flopped since its introduction last year, This is Money can reveal.

Exclusive data obtained by This is Money suggests that not only are people not taking so-called retirement interest-only mortgages – with just 660 sold since launch – but they have never even heard of them and don’t like the sound when they do. 

Retirement interest-only mortgages were supposed to help thousands of older homeowners remortgage to clear home loan debts they were still saddled with in retirement.

They were also considered to be an alternative to – and potentially cheaper option than – equity release for those seeking to tap into their home’s value to help fund their pension years.

Retirement interest-only mortgages allow homeowners aged over 55 to borrow on an interest-only basis without a repayment plan. 

They came to the market after the City regulator relaxed lending rules amid fears that thousands of interest-only mortgages are set to mature with no repayment plan in place.  

Official figures obtained by This is Money from the Financial Conduct Authority, via a Freedom of Information Act request, showed the number of retirement interest-only mortgages taken out has remained pitifully low. 

As of 1 July, just 548 retirement interest-only mortgages had been taken in 2019, bringing the grand total sold to 660 since their inception last year. 

The tiny completion numbers come despite official estimates suggesting there are tens of thousands of pensioners with no plan for how to repay their existing interest-only mortgages. 

It also follows a co-ordinated effort by the financial regulator and mortgage lenders to make it possible to remortgage interest-only loans after retirement. 

In March last year, the FCA officially 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 being sold annually to help these older homeowners, representing around £1.7billion in sales.  

One year in this figure looks a long way off, with only Nationwide and a handful of smaller building societies and specialist lenders currently offering the products. 

Over the same period in which the 548 retirement interest-only mortgage were taken out, some £1.8billion in housing wealth was unlocked via equity release, according to the Equity Release Council. 

And research suggests equity release will continue to be the far more popular route for older borrowers to leverage the equity in their home.  

Retirement specialist Saga asked 7,603 of its members on behalf of This is Money whether it had ever heard of either product.

It found that 94 per cent of respondents had heard of equity release, while only 27 per cent had heard of retirement-interest only mortgages.

Of the 27 per cent who have heard of them, only 37 per cent said they were familiar with the product – around a tenth of the original group asked.

The respondents were then told what a retirement interest-only mortgage is and what equity release is, and were then asked whether they would consider taking out a retirement interest-only mortgage.

Nearly eight out of 10 said they have never considered taking a retirement interest-only mortgage, and just 12 per cent said they have done or would be open to it. 

By comparison, nearly a quarter of respondents said they either had or would consider taking out equity release on their property. 

Why is equity release so much more popular?  

The main type of equity release product is a lifetime mortgage, where you borrow against your home but do not have to make monthly payments as with a traditional mortgage.

Instead, interest rolls up to leave a debt that is eventually paid by your estate at death, your surviving partner’s, or if you sell your home.

One of the main issues with equity release is that because borrowers can choose not to make any payments, the interest charged on the loan rolls up over the years and the compounding effect can see debt rise substantially.

Drawdown plans, which allow sums to only be taken out when needed, and equity release deals with the option of making interest payments can cut costs. 

A retirement-interest only mortgage is a cheaper option, as borrowers make interest payments and so their debt does not rise and eat into their home’s value.

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’.   

In other words when 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.   

These stringent criteria can make the deals unavailable to the borrowers that need them most. 

With equity release however, the option to roll up the interest into the loan and make it payable on death means these affordability rules aren’t a problem. 

 The FCA relaxed some of its lending rules last year to make retirement interest-only available

Experts have also previously highlighted the potential for commission bias pushing advisers to recommend equity release. 

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 much higher 3.5 per cent of the loan amount. On a £100,000 loan that is £3,500. 

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. 

This is Money has previously called for the regulator to address the potential for commission bias so that advisers aren’t tempted to offer a potentially less suitable product as a result of a larger commission share.