View the article online at http://citywire.co.uk/money/article/a873724
Interest-only mortgages: thousands may be forced to sell
Those expecting equity release to save them from their interest-only mortgages will be disappointed.
Thousands of older people with interest-only mortgages that come to maturity this year may be forced to sell as they won’t qualify for equity release.
This year marks the first significant wave of interest-only mortgages coming to maturity, with experts estimating around 40,000 people, possibly more, will have to repay their mortgage this year. Worryingly, half of those people do not have a plan in place to repay the mortgage.
Equity release has been lauded as a solution for those who have no plan in place to repay their interest-only mortgage, allowing people to take equity from their home to settle their mortgage.
Last year was a bumper year for equity release lending, rising 24% to £1.7 billion – equal to £4.7 million being released from property every day. The average person released £72,000, according to figures from Key Retirement.
However, many homeowners could be left disappointed as they will not qualify for equity release as they do not own enough of their property.
Of the 40,000 homeowners whose interest-only mortgages mature this year, just 40% - or 16,000 – will qualify for equity release, according to Dean Mirfin of Key Retirement.
This means, 24,000 people will be left with no way to pay off the mortgage and will be forced to sell.
‘40% of interest-only mortgage-holders can be helped with the existing [equity release] product range but 60% cannot be helped because their loan-to-value is too high,’ he said.
Typically, a person taking out an equity release mortgage has a loan-to-value (LTV) of between 33% and 35% - meaning they own around two-thirds of the property. If they have health problems then a LTV of 40% to 42% is accepted.
Mirfin said those wanting to repay their interest-only mortgage ‘typically have a LTV of 50%’ and ‘unless these people have other resources, equity release cannot help’.
The increase in declined equity release applications comes at a time when the number of people using equity release to repay their mortgage has increased substantially. In 2010, one in five people used equity release to clear their mortgage debt but this increased to one in four last year.
Five years ago those using equity release to repay mortgages were doing so because of a shortfall in their endowments, an investment typically taken out with the mortgage that aimed to clear the sum.
Now, endowment shortfalls are no longer the problem – failing to pay down the mortgage and borrowing too much is.
‘Those people with high LTVs [at maturity] are the ones that moved frequently as opposed to those with [lower] LTVs who stayed in their house for 25 years or just move the once and didn’t borrow for a new kitchen when the going was good,’ said Mirfin.
‘We are seeing an increasing number of people with no plan in place [to pay off the mortgage] and what is scary is how much they owe. They may have a £300,000 home but they still owe £150,000 or £160,000.’
Vanessa Owen, an equity release expert at insurer LV=, said there was a group of people who would find itself stuck between interest-only mortgages and equity release schemes.
‘At the moment we are in a situation where we have a cliff edge… and what people are now starting to focus on is what transition products [that take people between interest-only and equity release] will look like,’ she said.
‘People who find themselves at the cliff edge need to be firstly talking to their lender. Most [homeowners] will be in a situation where they can continue to service the interest and their lender may be able to help them… with a type of extension to their interest-only mortgage.’
Owen said an extension could buy valuable time for homeowners who did not qualify for equity release because their LTV was too high. It would give them time to lower their LTV and as they age the amount of the property they needed to own to qualify for equity release would reduce.
However, homeowners will need to reach their 70s before a 50% LTV is accepted by an equity release scheme.
‘[If your interest-only mortgage is coming to maturity this year] do not panic and work through it with your lender,’ she said.
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