Interest-only mortgages and the older borrower
Look back to 2007, and the UK property market was at its peak. House prices were high, and mortgages were readily available to a wide range of people, often with low deposits and poor credit ratings. This left thousands of people with phenomenally big mortgages, and – crucially – unable to accommodate even the slightest increase in rates. And the rest, as you know, is history.
What you might not know is that the government then went on to launch the single biggest review of mortgage regulation in recent years, the Mortgage Market Review. Somewhat unfortunately, this is often shortened to MMR. Catchy, hey?
Anyhow, at its core, the MMR tightened the rules and required affordability to be checked much more stringently. It all sounds common-sense, but a recent report from Age Partnership suggests that the tougher criteria mean that growing numbers of interest-only borrowers are struggling to extend the length of their mortgage to clear their debt due to being deemed too old.
And the figures speak volumes. In Q1 2014, just before the introduction of the MMR, just 45 customers used equity release to pay down their interest-only mortgage. By Q4 2015, this number hit 775 – the highest quarterly total to date. The amount owed on interest-only mortgages has also risen by £11,000, from £55,397 to £66,035 in just one year.
Faced with such significant debt and little chance of paying it off, it’s easy to see why people are turning to equity release, but there is another option. Our Home for Life Plan allows people over 60 to save up to 59% off the cost of their next home, so as you can imagine, the savings can be significant.
Let’s look at an example. Mr Smith (imaginative, I know) has an interest-only mortgage of £65,000 to pay and his house is currently worth £300,000. Based on his age, personal circumstances and property criteria, he’s entitled to a discount of 33%. So, he could buy a house for the same value as his current home for £201,000, leaving £99,000 to pay off his interest-only mortgage and, well, do whatever else he wants.
According to recent data from the CML, 3 million people had interest-only mortgages outstanding in 2014. For older borrowers who are unable to go down the traditional route of remortgaging, this is quite literally a ticking time-bomb.