The interest-only shortfall crisis
The 80s was a defining decade for home ownership with a boom in house price rises, and the Conservatives’ ‘right to buy’ policy encouraging more of us to invest in bricks and mortar.
But one legacy of the era was a large number of homeowners who bought their property with an interest-only mortgage – often alongside poor performing endowment policies – many of which are now coming to an end. A number of these borrowers do not have provision to pay the capital owed on their home, having only paid the interest for the term of the loan.
It’s estimated that almost one in five mortgage customers – around 1.7m people – have an interest-only mortgage and although some have a clear plan to either sell the property at the end of the mortgage term, have overpaid their monthly repayment to chisel away at the capital owed, or simply saved funds elsewhere, for others there is a shortfall to fill.
If you have a mortgage shortfall in retirement, what can you do about it?
With a peak of interest-only mortgages anticipated to mature in 2027/28 and 2032, the problem is not going to disappear any time soon for these homeowners, but there are other options particularly for those at or near retirement age.
Retirement interest-only mortgages
One of these is a retirement interest-only mortgage, which also has the potential to unlock some of the equity in a property. Similar to a standard-interest only mortgage, there is no minimum age requirement and the products are aimed specifically at the 50+ market, pre- or post-retirement.
Easier to qualify for than a standard mortgage, the borrower only has to prove that they can afford the monthly interest payments and the loan will be paid off when they die, move into long-term care or if they sell the house.
Providing an alternative to equity release schemes which include no payment but a roll up of interest thereby reducing the property’s equity, a retirement interest-only mortgage will cost less and leaves the property’s value intact until the time comes to sell it.
The amount that can be borrowed is based on an applicant’s retirement income and loan to value ratio, but if the property’s value permits, some equity can be unlocked.
Retirement interest-only mortgage deals
There is a range of products available, many with benefits. For example, one lender’s retirement interest-only mortgage starts at 3.34 per cent with up to 60 per cent loan to value (LTV) with no term restrictions, and up to 25 per cent equity release.
Another lender which accepts 100 per cent of pension income and 75 per cent of investment income over a period of up to 40 years will offer an interest-only mortgage up to 50 per cent LTV (£150k equity required), or alternatively a capital and interest option up to 70 per cent LTV (75 per cent if the loan finishes before retirement). Announcing a new 5-year discount rate of 3.25 per cent (standard variable rate, minus 2.49 per cent) for 60 months with an application fee of £199 and a completion fee of £500, the lender is offering a free remortgage valuation.
Creating an affordable property finance solution in later life – particularly for those who want to remain in their home and leave a legacy for their families – a retirement interest-only mortgage is a great way to address a shortfall in capital repayment.
As Bob Dylan once crooned, ‘The times they are a changin’, and for the baby boomer generation a retirement interest-only mortgage is a welcome change that creates real opportunities to finance and retain a property in later life.