If you’ve found yourself trapped on an interest-only mortgage, don’t despair – here’s one possible solution for you.
Across the United Kingdom, thousands of people have found themselves stuck with an interest-only mortgage, which they probably took out sometime during the 1990s or early 2000s. This year, the Financial Conduct Authority (FCA) is expecting to see a peak in interest-only mortgages maturing, with this spike put down to the maturation of endowment mortgages, which were marketed heavily around the turn of the millennium. Many people bought into these policies believing that their investment would pay off their mortgage capital at the end of the policy’s term, but research by the FCA has found that most will finish out of pocket, to the tune of £22,100 on average. Up to half of the shortfalls could even be as high as £50,000.
The majority of those affected are thought to be within the age range where they are approaching retirement, and many will have enjoyed higher incomes, higher assets stored up and possibly higher equity in their homes. Previously, banks have been unwilling to lend to older people for fear they will not be able to fully repay any loans that are taken out to help cover their mortgage repayments, but now they are coming under increasing pressure to act.
Whichever bank or building society you hold your interest only mortgage with, don’t despair – many lenders are now looking at how they can extend a valuable lifeline to those affected.
Interest-only mortgages: did you buy in?
At their peak in the 80s and 90s, interest-only mortgages are thought to have accounted for over 80% of mortgages taken out. They were promoted heavily as a cheaper and simpler way to get onto the first rung of the property ladder, but the FCA now estimates that around half of the 2.6 million interest-only borrowers will now struggle to clear their debt.
While some lenders have decided to let their customers keep their interest-only mortgages until they reach the age of 75, others have pulled the rug from beneath the feet of borrowers. Many of those who have lost out now face the very real and very daunting prospect of making up the shortfall in some way, or being forced to sell the homes they may have lived in for decades.
Banks under pressure
With this problem set to affect so many people, lenders have come under increasing pressure to offer an alternative solution. Many are now looking at providing borrowers with equity release plans, allowing them to unlock some of the wealth stored up in their homes, in order to make up any endowment shortfalls and pay off their mortgages.
What is an equity release plan?
Equity release plans are precisely that – they enable those with interest-only mortgages to free up a portion of the assets they have stored in their property, meaning they can use the funds which are released to cover the remainder of their mortgages.
Unlike a regular mortgage, most equity release plans do not call for monthly interest payments and the total amount owed, including both the capital released and interest accrued, is only repaid once the borrower(s) have either moved into a care home or have passed away. You are usually eligible for this type of plan if you’re aged over 55 and your home is worth more than £60,000, and such policies are becoming increasingly popular with those nearing retirement age. Equity release provider Responsible Equity Release estimated that 36% of people taking out an equity release policy did so to clear their mortgages, with £60,000 the average sum withdrawn.
The major providers
Several banks and building societies have begun to encourage those with interest-only mortgages to look into equity release, among them Santander, who recently joined forces with Legal and General to offer customers a lifetime mortgage policy, meaning they can free up capital from their homes to pay off their mortgages. With Santander’s flexible policy, borrowers can choose not to pay monthly interest or they can make voluntary payments if they are concerned about the amount of interest being accrued. This means borrowers have the right to remain in their homes for the duration of their lives, after which the bank recovers any money owed through the sale of the property.
Another provider to consider is Shawbrook, which earlier this year launched a mortgage specially designed for those who could not clear their outstanding debts. The policy is being made available to interest-only borrowers aged between 55 and 75, who are entitled to borrow half their property’s value for fifteen years or until they reach the age of 85. The equity release scheme does come at a cost, however, as Shawbrook charges 6% interest on a five-year fixed contract, compared to Santander’s more reasonable 1.89% charge for the same period.
The pros and cons
There are advantages to taking out an equity release policy to pay off an interest-only mortgage, but it’s not a decision to be taken lightly. By leveraging capital from your property and making up your mortgage shortfall with released equity, you can be reassured that you can continue living in your family home, even when your interest-only mortgage comes to an end. It’s difficult to put a price on the peace of mind which comes with knowing you won’t have to sell up and can remain in your home for the remainder of your life.
This peace of mind needs to be weighed up against the fact that an equity release scheme could impact on the benefits you can claim, and will also put a sizeable dent into any inheritance you may want to leave behind when you die. For that reason, it is always wise to take your time and seek professional financial advice before entering any equity release scheme when your interest-only mortgage ends.