These materials are intended for use by Financial Advisers only

OneFamily Adviser

9th January 2020

Helping customers with interest-only mortgages

There is concern that a significant number of interest-only mortgage borrowers could struggle to pay off the balance or switch to a new mortgage when their current loan reaches the end of its term.

In 2018, 18% of all mortgage borrowers had interest-only mortgages[1]. What options are available to them if they don’t have the funds to repay their loan?

Downsize

Borrowers can use the sale of their home to pay off the balance of their interest-only mortgage.

Downsizing can be a good solution if there is a suitable property to downsize to, but it’s not always possible to move to a cheaper home and maintain a similar lifestyle. It can affect people’s ability to work, access services, see friends and family or be part of a community.

That’s not to mention the attachment many people feel to a family home, the cost of moving and stamp duty.

Extending the current interest-only mortgage

Some providers are willing to extend interest-only mortgage products or may have alternative suitable products borrowers can switch to without having to refinance to a new lender.

Today some mainstream lenders lend up to the age of 85, and specialist lenders even older. However, affordability tests need to be undertaken to ensure payments are affordable into retirement.

Remortgage to a lower rate mortgage and overpay

By remortgaging, customers may be able to find a mortgage with a lower interest rate, freeing up cash to make monthly over-payments to begin paying off the loan as well as the interest, or to save up enough money to pay off the loan at the end of its term. As customers move into retirement income often drops, and this solution is not always suitable.

Switch to a repayment mortgage

Some providers allow borrowers to switch their loan from interest-only to a repayment basis.

Switching to repayment will likely mean much higher monthly payments are required, so it’s typically not a viable option for those with interest-only mortgages coming to maturity soon, unless they have significant savings or income to make payments and cover the shortfall.

Some mortgage providers offer ‘part and part’ mortgages – part interest-only, part repayment - which may be suitable for those with enough savings or income.

Switch to a retirement interest-only mortgage

Retirement interest-only (RIO) mortgages are loans for older borrowers where the lender does not seek repayment until a specified life event, usually death or a move into residential care, rather than the end of the mortgage term. At this point the loan is repaid through the sale of the property.

In 2018 the Financial Conduct Authority (FCA) introduced new rules for RIO mortgages[2]:

  • Disclosure of any restriction on other people living in the property
  • Disclosure that a RIO may affect the customer’s tax position and entitlement to means-tested benefits with a recommendation the customer should consider seeking advice in this respect
  • For advised sales, when considering suitability, the impact of a RIO on the customer’s tax and benefits position must be assessed or, the customer should be advised where they can seek information in this respect
  • Disclosure that a lifetime mortgage may be more suitable

RIO mortgages can be a good fit for pre-retirement when borrowers still have several years of income ahead, but perhaps less suitable for those whose income is expected to decline in retirement. Each borrower must be able to afford the monthly interest payments.

RIO mortgages haven’t been flying off the shelves. Just 660 were sold in the first half of 2019[3].

Equity release

Lifetime mortgages are the most popular form of equity release. Like RIO mortgages, lifetime mortgage lenders do not seek repayment until a specified life event, usually death or entry into residential care. The loan is then repaid through the sale of the property.

In 2019 70% of OneFamily Super LTV Lifetime Mortgage customers used part of their loan to clear an existing mortgage[4]. The amount a homeowner can borrow with a lifetime mortgage is based on age and property value, not income.

Super LTV – up to 58%

The OneFamily Super LTV Lifetime Mortgage allows homeowners over the age of 70 in England and Wales to release up to 58% of the value of their home.

We have found it to be particularly helpful for customers looking to pay off interest-only mortgages, thanks to its high loan-to-value.

The Super LTV Lifetime Mortgage comes with flexible payment options, so borrowers can make payments up to 10% of the original loan amount in order to manage the size of the loan. A no negative equity guarantee that ensures they never owe more than the value of their home.

Educating customers on later life lending

There are still some pervasive later life lending myths that could stop homeowners considering equity release. For example, 66% think they can’t make payment towards the size of the loan, and 71% think they could end up in negative equity.

It’s important that consumers fully understand their options when making these decisions.

Be the one who can

Find out more about the OneFamily Super LTV Lifetime Mortgage. You can help your customer release enough equity to pay off their interest-only mortgage at the end of its term.

View Super LTV