The UK financial watchdog is considering proposals on whether older borrowers should be allowed to take out interest-only mortgages.
The FCA is consulting on the reintroduction of interest-only mortgages for the elderly which run until the borrower’s death or when they move into residential care.
Customers will still have to be able afford the ongoing interest payments, but loans will ultimately be repaid through the sale of the property.
Lifetime and retirement interest-only mortgages were lumped together when the Mortgage Credit Directive was implemented in 2014.
A lifetime mortgage is a type of equity release which you can use to extract your funds in a single lump sum or in smaller amounts over time through what is known as drawdown.
However, the interest on lifetime mortgages is rolled up or compounded over the duration of the loan, which means the debt can increase greatly.
The FCA said: “Retirement interest-only mortgages have significantly different risks compared to lifetime mortgages. In particular, they do not feature the roll-up of interest, meaning that consumers are not at risk of rapid equity erosion and the subsequent reduction of funds available for a bequest.”
David Hollingworth, of mortgage broker L&C Mortgages, said: “Older borrowers have found that the range of mortgage options open to them has become more restricted as lenders adjusted their criteria following the Mortgage Market Review. Although mortgages remain available beyond retirement age for those that can demonstrate that it would be affordable, many lenders impose maximum age caps at the end of the mortgage term. That could limit the maximum age at the end of the term to 70 or 75 in some cases.
“Some lenders can consider lending for longer and there have been some improvements recently, but the regulator seems to be recognising that there could be room for more options for older borrowers in its consultation document. Traditional equity release can be a useful option for the right borrower but this could help open up more options for those that can afford to meet a mortgage payment and would prefer to use a standard mortgage.”
Charlie Blagbrough, policy officer at the Building Societies Association, said: “This proposal to take retirement interest-only mortgages out of the lifetime mortgage definition is a welcome move from the FCA. It recognises that these mortgages are substantially different from lifetime mortgages as they do not lead to housing equity being eroded.
“For some customers, sale of the property on death or moving into residential care may well be an appropriate capital repayment vehicle. If they have sufficient retirement income to meet affordability from a pension, rental properties or other sources to service the interest on the mortgage rather than rolling it up, then this product offers a great solution.
“Currently a couple of building societies offer these mortgages. If this change leads to more such products on the market, providing consumers with greater choice in their retirement years, then that can only be a good thing. Our report ‘Lengthening the Ladder’ earlier this year projected that mortgage borrowing into and in retirement will reach £40 billion by 2030. Lenders need to be prepared for this shift.”
The move could potentially help older borrowers with interest-only mortgages that are about to mature.
The FCA estimates that 600,000 interest-only borrowers will see their mortgages mature before 2020. Of these customers, just under half are expected to have a shortfall, with around a third of these shortfalls expected to be over £50,000.
Many of these people will either have to resort to selling, downsizing, or turning to savings or pension pots. This is despite the fact that many have good incomes and can continue to service a mortgage.
Alice Watson, head of marketing at Retirement Advantage Equity Release, said: “Lifetime mortgages are a viable and a flexible option, and provide a number of safeguards that the proposed retirement interest-only mortgages may not offer.
“One difference between this and the proposed retirement interest-only mortgage is that, if customers miss their monthly interest payments, they can switch to interest roll up without threat of repossession, so long as they abide by the terms and conditions, which offers customers real peace of mind.
“The proposed retirement interest-only mortgage may also be offered without the client needing to take financial advice. We believe this carries its own risks and could potentially leave the customer worse off.”
The consultation is open until 1 November.
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