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Interest-only mortgages: thousands may be forced to sell

Those expecting equity release to save them from their interest-only mortgages will be disappointed.

 
Interest-only mortgages: thousands may be forced to sell

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. 

15 comments so far. Why not have your say?

John Clay

Jan 14, 2016 at 20:30

Why should anyone be forced to sell, when they can keep paying the interest?

There is no cliff edge. The mortgage term (25 years in most cases) is a completely arbitrary time and there is no logical reason why the owners should be forced to sell at the end of this period as long as they keep paying the interest. The lenders have nothing to lose - they are making a profit from the mortgage - that's the deal!

If they want to be really greedy they can increase the interest rate and make even more money. And they can insist on a current valuation if they consider it necessary.

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mark antrobus

Jan 14, 2016 at 22:16

Agree with John Clay. Why would a lender want the bad publicity of making someone who is presumably close to or over the age of retirement homeless when they can continue to make money by extending the mortgage? I suspect this may turn out to be non-story.

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Cynical Investor

Jan 14, 2016 at 22:31

When did Borrowers intend to repay the Capital?

Maybe the Lenders will become Landlords!!

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snoekie

Jan 15, 2016 at 03:59

About 40 years ago I had an interest only mortgage, the new pension policy would repay the amount borrowed. Interest rates continued to rise so when they started dropping, rather than adjusting the standing order downwards, I converted it to a repayment loan so that as the rates continue dropping, the amount of capital repaid was getting larger, and in some instances I even increased it, and within about 11 years got to the stage where the whole life policy was worth approximately the outstanding mortgage.

After repayment, I accumulated and when a sufficient amount had been accumulated, invested in the stock market, and also applied the dividends received to that end.

I very much doubt that many of the borrowers the subject of the article actually even thought about it. To have a repayment only mortgage meant that they must have given some reason for being able to repay at the end of the term of the mortgage. Is it likely that they continued spending without thinking about having to repay?

I suppose that is the result of the post baby boomers, run up debt, and let tomorrow take care of itself.

Whilst I feel for them in their problem, and whilst this might seem harsh, they were actually setting themselves up for this eventuality.

I am fortunate in that I do not have to rely on equity release, as paying off the mortgage and ploughing back dividends has left me with a sort of reasonable income, even allowing for the possibility of dividends falling back a bit.

It would rather seem to me that many people have adopted the outlook of those from the dark continent, forget tomorrow, live for today.

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Al

Jan 15, 2016 at 09:06

With you Snoekie. The country has many social problems and financial irresponsibility is one of them. A period of tough love might help swing but then successive governments will baulk at the bad publicity of a few high profile cases portrayed by the socialist liberal media highlight and cave.

I well remember my 3rd mortgage I was expected just to accept a 3rd endownment and get on with it. After questioning the merits I was sent to see the financial advisor (Abbey Nat) who then tried to sell me both a PEP backed arrangement then incredibly a pension backed scheme! How glad I am I didn't go for the latter with lifetime caps now in place and no doubt high charges.

As it was I got an interest only and did not accept any AN backed repayment plan. They didn't even ask for proof of how I was going to repay. Them was the days, eh?

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PaulSh

Jan 15, 2016 at 09:20

If you borrow money for a fixed term then the lender will rightly expect that money to be repaid promptly at the end. Of course it matters to the lender if it isn't repaid, and just extending the term is the first step on the path to a permanent bad debt. Not to mention the poor employees in the lender's new mortgages department who are on commission to sell mortgages, but can't because the funds are tied up.

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andy

Jan 15, 2016 at 09:52

Sensational headlines with no substance and about as useful as "thousands may emigrate to Mars" and as truthful. I have an interest only mortgage - I have it because my income can be "lumpy" and so to overpay it I took interest only.

State needs to sort their "mortgage" (debt) out - I'll sort mine out.

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www.commercialtrust.co.uk

Jan 15, 2016 at 10:37

@John Clay and @mark antrobus,

It may not be as simple as extending mortgages when the borrower is nearing retirement. Since the Mortgage Market Review in 2014, lenders have been reluctant to grant mortgages that extend into retirement due to the difficulty in assessing affordability based on retirement income.

The upcoming Mortgage Credit Directive further complicates matters, as firms fear that the FCA may take retrospective action in some cases where lenders have interpreted the affordability rules to allow lending into retirement.

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Cynical Investor

Jan 15, 2016 at 11:09

So given this Directive it is possible those borrowers MAY get a Lifeboat from the FCA. Those of us who have acted responsibly will yet again wonder why did we bother.

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Andrew Collier

Jan 15, 2016 at 19:00

Sorry but doesn't add up.

40,000 mature this year, half of whom don't have a means to pay. (20,000)

Then later Of the 40,000 only 40% qualify for equity release leaving 24,000? No, there were only 20,000 had a problem, so its 60% of those that matter

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Stephen B.

Jan 16, 2016 at 09:37

Presumably some of these will be people who always expected to trade down on retirement, so being "forced to sell" may not be a problem.

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hooligan

Jan 16, 2016 at 11:19

smart commenting above...but in order to comply with the "lie, cheat and steal" mentality of this government and banking sector (never repay debt and allow 0.5% bank funding with no taxes), i see no reason to take out or pay anything other than interest only loans ...ever...banks should be competing to pass on the Bank of England's 0.5% interest rate with a smal margin of 0.5% for floating rate of !% interest.

This should enable everyone to scale up to the largesse of big banks and governments so that a 1/2 million pound house costs 100 pound a week. You can see the dvatage being hnded to the banks as they speculate with free lunches globally with this sort of tax and interest free funding to rip clients off.

getting trapped in these conversations, simply highlights the one rule for baners and governmnt and one rule for th voter "rip-off" in place.

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landlord 88

Jan 16, 2016 at 11:50

If I am faced with having to sell my house now to settle the mortgage or keep up with the interest payment and sell it later, I cant think of any circumstance that I would not go for the latter - If at all possible, the lender can have their money back after my demise. Personally, I think it is a no brainer - I get to live where I want to live, the lenders get their money back and make some money in the meantime - all in their ordinary course of business.

However, the never ending rules make it more and more difficult to do so and the end result is that oldies are forced out of their homes now although they areI able to keep up with the interest payment - rather than later.

It is well known that oldies are asset rich and cash poor - tax breaks encouraging people to sink all their money into their homes only exacerbate the situation. Current rules make it so that they die with £000s of equity which they cant spend while they are alive or force them into renting with a hugh bank balance thats earning zilch and risk running out of money and then have to rely of the state. Meanwhile, make it expensive for oldies to keep their homes. The whole concept just doesnt make sense.

If absolutely necessary, why not restrict lending to the oldies to an amount of equity to guarantee return of capital to the lenders to safeguard the banking system ? Better still, the powers that be ought to keep their oars out of the market. Let the banks go bust. Let people make mistakes. Market will take care of itself. Always has.

If I dont know any better I would think our policy makers are sadists prone to malicious intent or just plain incompetent.

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Tony Burns

Jan 16, 2016 at 14:59

Silly article in my view seeking headlines and stirring up trouble, doubts and fear without needing to do so..

No lender unless the borrower is alreafy behind with payments will make them sell. The lender will allow mortgage to continue and this is what people who took out interest only mortgages with no repayment plan in place always intended to do.

If yet to retire not a problem and if retired since they will have been paying don't see any issue.

Personally as a retired financial adviser I have never liked ER.

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xxxxx

Jan 16, 2016 at 17:18

https://www.citizensadvice.org.uk/about-us/how-citizens-advice-works/media/press-releases/1-million-mortgage-holders-have-no-plan-on-how-to-repay/

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