The number of older borrowers who are using equity release as a way to pay off an interest-only mortgage has tripled since last April, new research from retirement income specialist Age Partnership reveals.
The reason for that is the Mortgage Market Review (MMR), introduced last spring, as the change in affordability rules resulted in fewer remortgage options for older borrowers.
Since the change, older interest-only borrowers have found it almost impossible to remortgage their debt because of their age, leaving lifetime mortgages – a type of equity release plan – as one of the only options open to them short of selling their home.
On average, customers using equity release to repay an interest-only mortgage in April 2015 were 69 years old – meaning they are past what may traditionally be their retirement age and will usually be deemed too old to qualify for an ordinary remortgage.
While April 2014 saw just 78 customers use equity release to pay-down an interest-only mortgage, the numbers are steadily climbing following the introduction of MMR. May 2014, the first month following the new regulation, saw 124 equity release customers for interest-only mortgages.
Meanwhile, this April saw the highest monthly volume of customers yet (229), meaning monthly customers have tripled (up 193 per cent) year-on-year, Age Partnership says.
In total, 2,246 older borrowers have used equity release to pay off an interest-only mortgage in the twelve months since the introduction of MMR.
The average amount released by the customers was £73,980 in April 2015, and the average interest-only mortgage held was £61,846, according to Age Partnership estimates.
The average savings of these customers amounted to only £13,926 but thanks to the property wealth they held, which was £271,179 on average, they were able to pay down their debts.
Following equity release, and after clearing their interest-only mortgage, this left them with cash worth £26,060.
The FCA estimates that around 600,000 interest-only mortgages are set to reach the end of their term by 2020, and that half of those affected have no means to pay back the debt, meaning 300,000 borrowers could be set to become interest-only “mortgage prisoners.”
Simon Chalk, equity release expert at Age Partnership, comments:
“The interest-only time-bomb has been made all the more devastating by the affordability criteria introduced by lenders as a consequence of the Mortgage Market Review. Fewer older homeowners have the opportunity to remortgage to set up a new strategy to clear their debt. That leaves swathes of homeowners with no obvious way to clear their interest only debt whilst still remaining in their home.
“Thankfully, rising house prices mean that some borrowers can use their housing wealth to pay down interest-only mortgages by simply switching to a lifetime mortgage. These cases are occurring more regularly, and can provide a way for retirees to ease the pressure of debt without leaving their homes. It’s fundamental to get the message out to retirees concerned about paying back an interest-only loan that equity release could work for them.
“Importantly, unlike with a normal mortgage age isn’t a problem with an equity release plan. In fact, it’s the exact opposite; the older the borrower, the more money they can release. These modern plans on offer can provide a vital solution for interest-only mortgage prisoners.”
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