These materials are intended for use by Financial Advisers only

OneFamily Adviser

Helping customers with interest-only mortgages

Our research found that 28 percent of mortgage borrowers aged 55 plus have an interest-only mortgage. The research also suggests that, over the next five years, 40 percent of all over 55s with an interest-only mortgage will see them come to term.

Interest-only mortgages coming to term

This means that, potentially, one in 10 (11%) mortgage holders aged 55 plus will have to pay off their remaining interest-only mortgage or find an alternative arrangement within the next year.  Many will have planned for this eventuality with the intention that they realise assets or use a repayment vehicle such as an investment policy that would be due to mature at the same time.

The financial landscape has changed drastically since these mortgages were taken out; the 2008 stock market crash, years of austerity and the recent turmoil in the markets have all had an impact.  Those who financed their homes believing that they would be able to repay their mortgage from the future value of assets or from investments may now need to look for alternative ways to cover the costs.

So how can interest-only mortgage borrowers be helped? 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:

  • 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 a significant share of OneFamily Super LTV Lifetime Mortgage customers used part of their loan to clear an existing mortgage.

Case studies:

Mr and Mrs Jones

Mr and Mrs Jones (aged 61 and 59) owe £80,000 on their maturing interest-only mortgage, and their property is currently valued at £350,000.Mr Jones is still working full time, and Mrs Jones is part-time, so they have a reasonable income.

They would like to fix the rate charged at the outset of the loan. They have decided that they wish to maintain 100% of the interest payments on the loan until their planned retirement in 5 years’ time. Once they retire, they would like to cease payments and are aware and comfortable in the knowledge that the interest will roll up after this time.

In this circumstance a OneFamily Interest Payment Fixed Rate Standard Lifetime Mortgage may be suitable for these customers.

There is no proof of income required with this product.

If at any time during the loan (e.g. when they retire) they decide not to continue with the payments (or if they miss four monthly payments) they can switch over to the OneFamily Interest Roll Up product. This product also offers the added benefit of allowing the customer to make a Voluntary Payment of up to 10% of the original loan each year.

Mr Smith

Mr Smith (aged 72) has a current interest-only mortgage with a high street bank and they have written to him to state that the loan is due to be repaid.

Mr Smith is retired and has a pension, but his income is insufficient to apply for a retirement interest-only mortgage. His home is worth £375,000.

A suitable option available for Mr Smith may be the OneFamily Super LTV Interest Roll Up Fixed Rate product which will allow him to raise a sufficient amount to repay his existing loan of £170,000 and an additional £6,250 for home improvements.

With this product he also has an added benefit that he can make voluntary payments of up to 10% of the original loan if he wishes, but this is not compulsory, and he does not have to make any payments if he chooses not to.

The interest on the loan is rolled up and repaid when Mr Smith goes into long term care or dies and the property is sold.

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.

All research conducted by Opinium, on behalf of OneFamily, in April 2020 among a sample of 2,000 UK adults aged 55+.

Super LTV

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