For certain borrowers interest-only mortgages could be the ideal lending option – they may even provide a solution for those in their 90s and mortgage prisoners. Matt Kingston busts the myths surrounding these products
While it’s true there are considerably fewer interest-only products than repayment mortgages, there is a place for them in today’s market.
Mortgage brokers often don’t always consider them but there are times when they can be a good option for borrowers.
So, what are the myths surrounding interest-only mortgages?
Myth 1: You have to be employed to get an interest-only mortgage
Not necessarily. By looking at a borrower’s entire income, which includes pensions and any other financial assets such as investments, trusts and buy-to-let property, many people will be able to afford an interest-only mortgage.
Pension income is reliable and can go up each year.
Take the state pension which normally has the triple lock attached to it and will rise annually in line with the highest of three measures: 2.5%, average earnings growth or the previous September’s inflation rate.
The government has temporarily suspended the triple lock by removing the wage growth element so the state pension goes up by 3.1% this year in line with last September’s inflation rate.
Some annuities and private pensions are linked to inflation, such as defined benefit or final salary schemes – and so again these will rise. Around 30% to 40% of our customers have defined benefits pension schemes and this provides protection of borrowers’ income.
Myth 2: You can’t get a mortgage if you are retired
This isn’t true. Just look at retirement interest-only (RIO) mortgages – the clue is in the name.
You don’t actually have to be retired right now to have a RIO but the idea is that your mortgage will move with you into retirement.
With this type of mortgage, your future earnings, such as pension income will cover the monthly mortgage repayments.
Myth 3: You can’t get a mortgage if you are in your 80s or 90s
Yes, you can. As long as you can prove you can afford to make the repayments each month, we should be able to consider you for a mortgage.
Our oldest customer was 92 years old when she took out a mortgage with us. She had come to the end of her interest-only mortgage and had to pay back the loan to her lender.
Her only option was to sell up and downsize, or so she thought, until she was introduced to us. She could easily afford the repayments so was able to stay in the home she had lived in and loved for many years.
Myth 4: You cannot pay off any of the outstanding loan during the term of the mortgage
It depends on each lenders’ conditions but we allow borrowers to overpay by 10% each year in the fixed rate period without any early payment charge being applied and an unlimited amount thereafter, which will reduce the final outstanding balance when the mortgage is redeemed.
If borrowers can afford to overpay, this is a good way reduce the outstanding balance at the end of the mortgage term.
Myth 5: Mortgage prisoners can’t remortgage onto a new interest-only mortgage
Mortgage prisoners may well be able to take out a new interest-only mortgage to settle their old interest-only mortgage, often at a lower rate than they were previously paying.
At LiveMore, we should be able to help, provided the borrower is not in arrears and can afford the monthly repayments.
Even if there have been some past arrears, we have products which take that into account, although the rate will be a little higher to reflect the increased risk.
So, it is possible to take out interest-only mortgage even if borrowers are in the 50 to 90+ age group and even if they are retired or approaching retirement. Age should not be seen as a barrier.
Matt Kingston is head of key accounts at LiveMore
