If your interest-only client has a potential capital shortfall in retirement they can’t afford to repay, selling their home or equity release aren’t their only options, says Tom Gurrie, our Intermediary Sales Manager.
Nearly one in five outstanding mortgages is on an interest-only basis, so you potentially have a fair few on your client book.
Hopefully most of them have a repayment plan in place and on track to pay off their debt, but realistically some of them won’t.
The FCA warned last week that many interest-only borrowers could be at risk of losing their homes at the end of their term, so what should these borrowers do?
Options for interest-only borrowers
Switching to a repayment mortgage is a one option, but how many interest-only borrowers can afford to do that?
Even part-and-part deals are financially unachievable for some borrowers, and may still leave a shortfall that can’t be repaid.
One option is equity release, which can be a solution for some interest-only borrowers, enabling them to pay off the interest-only mortgage debt by taking a lifetime deal.
But it isn’t the only option.
Lending beyond retirement
Mainstream lenders are still catching up with the demand for later life lending, but a handful of innovative mortgage products do cater for older borrowers.
Times have changed and not everybody stops drawing an income at State Retirement age – in fact many older borrowers are perfectly capable of paying a mortgage.
Whether it’s full-time or part-time work, a buy-to-let portfolio, private pension or other income, the finances of older borrowers are as diverse as any other group.
We’ve seen lenders increase their maximum age limit to borrowers on standard deals, but there is still a limit. Retirement interest-only deals go further, as they often have no age limit, continuing until death or long-term care, when the sum is repaid from the sale of the property.
Retirement interest-only mortgage are making a comeback and they could be boosted further, with the FCA having recently consulted on separating out this product stream from the umbrella of lifetime mortgages. In short, this will increase access for clients and brokers to these products, which is likely to bring more lenders to the sector.
We launched our Retirement Mortgage
for this very reason – to cater for those who want to borrow beyond retirement – over the long term. If a borrower can prove affordability for their lifetime, and has plans in place in case their income or circumstances change, we don’t think their age should prevent them from borrowing.
The borrower will know exactly how much needs to be repaid on death or moving into long-term care and contingencies can be put in place from the start. They may even go down the equity release route later on in life. Vernon’s Retirement Mortgage
can be taken out with a Lasting Power of Attorney in place, so a trusted family member or friend can manage the mortgage if the borrower can’t. This also has the benefit of the close family being aware of the mortgage secured on what for some may be their future inheritance. The Vernon mortgage also has a repayment option, and with no ERCs, lump sum repayments at any time can further reduce the capital balance.
Of course, legal advice is always recommended on this type of mortgage because of the potential impact on the client’s estate or access to state benefits.
These are specialist products and they don’t suit everyone. But if any of your interest-only clients are facing a shortfall, they are certainly worth investigating.
View our range of retirement mortgages
. Call our intermediary team on 0161 429 4327
for more information.