Nearly one in five existing mortgage customers have an interest-only mortgage and the Financial Conduct Authority (FCA) is concerned that shortfalls in repayment plans could lead to people losing their homes.
There are currently 1,600,000 full interest-only and part capital repayment mortgage accounts outstanding in the UK. They represent 17.6% of all outstanding mortgage accounts and over the next few years increasing numbers will require repayment (www.fca.org.uk/news/press-releases/fca-urges-action-on-interest-only-mortgages – 30.1.2018).
In 2013, the FCA identified three residential interest-only mortgage maturity peaks. The first peak, happening now, is likely to have more modest shortfalls due to the profile of customers typically being those who are approaching retirement with higher incomes, assets and levels of forecast equity in their property at the end of term.
The next two peaks in 2027/2028 and 2032 include those on lower incomes who took out larger mortgages and who are forecast to have much higher outstanding balances to repay.
Equity Release Supermarket customers (Equity Release Supermarket Customer Fact-Finds) are telling their advisers:
- The investment vehicle that they took out to help repay their interest-only mortgage did not perform as they expected - leaving them with a shortfall.
- They did not have a repayment vehicle in place to meet the shortfall as they planned to sell and down-size. However, their plans have changed as they would prefer to stay in their family home because they have family and friends that live locally.
- Their current lender is not able to extend their existing mortgage into retirement.
- They are not able switch to a repayment mortgage because they are retired, and their income could not meet the incremental repayments.
- They cannot switch to a repayment mortgage because they are close to retirement and their likely retirement income will not pass their current lender’s ‘affordability checks’.
If this sounds familiar, then equity release could be the ideal solution to repay an interest-only mortgage as it allows homeowners aged over 55 to access the equity within their homes without moving or losing ownership of their home.
The money released is tax-free and can be used for any purpose. One of the added benefits of equity release is that typically no repayments are made and the amount borrowed and interest that has rolled-up are only repaid when you die or move into long term care. The obvious downside of equity release is that it will reduce the value of your estate which is passed onto your beneficiaries (for example your children).
If you are considering equity release, then you need to speak to a specialist adviser – such as the experts at Equity Release Supermarket. With access to the whole of the market, your adviser can find a plan tailored for you and explain the pros and cons of using equity release to repay an interest-only mortgage.