29 September 2023

Could interest only mortgages help with the cost-of-living?

By LiveMore

“Last winter, I didn’t put the heating on”, explains one homeowner in her 60s, as she discusses how the cost-of-living crisis has affected her.

It makes for difficult reading, and there are many examples of people having to cut back or work extra hours.

Another said: “I run my own business and this year I’ve had to work many more hours and much harder just to keep up. I haven’t had a day off for six months and there’s no way I can think about an actual holiday.”

For people who want to preserve the equity in their property, an interest-only or retirement interest-only mortgage could be a way to help with their current financial circumstances.

Another look at interest only

Once, interest-only loans were demonised, but now, in the right circumstances, they could be a useful tool in the battle against the cost-of-living crisis, with lower monthly payments and potentially lower interest rates.

Today’s interest-only mortgages are very different from bygone days where there no requirements by lenders to check whether the borrower had a credible repayment plan in place to repay the capital.

For example, LiveMore recently helped a borrower who had mounting debts and was worried about their upcoming mortgage renewal.

By offering an interest only mortgage, not only did LiveMore enable the client to consolidate their debt, but they also reduced their monthly outgoings by £920.

What is a RIO anyway?

There is an illusion of complexity around retirement interest only mortgages that needn’t be the case. Simply put, a RIO is an interest only mortgage without an end date. The borrower simply pays the mortgage off when their home is sold, typically when they die or go into care.

There are compelling reasons why a RIO might work for older borrowers:

  • Simplicity - For the borrower, it’s one consistent payment for the rest of their life
  • More borrowing - Because there is no reversion stress test in fixed for life RIOs, a borrower can often borrow significantly more
  • Preserving equity – If a borrower can make monthly payments, then this is a way to stay in their home while preserving equity, unlike a lifetime mortgage

Why would an older borrower take out an interest-only mortgage or RIO?

There are many situations where interest-only mortgages or RIOs would suit borrowers.

  • Cost of living crisis - many people are struggling financially but they could take out some equity from their home to improve their standard of living. This is cheaper than building up credit card debt for example.
  • Debt consolidation – by bringing mounting debts into one payment. Again, this is likely to bring down the monthly payments.
  • Interest-only borrowers coming to the end of their mortgage term – there are borrowers who took out interest-only pre-global financial crisis with no repayment vehicle attached so still owe the original capital. When the mortgage is due to mature many lenders want their money back and will not remortgage, but we may be able to help.
  • Mortgage prisoners – stuck paying high rates and unable to remortgage to a lower rate because they don’t pass affordability criteria. if only they knew other options could be explored and we may be able to help.
  • Longer mortgage terms - many people are retiring but the mortgage has still not been paid off.
  • Supporting family - family members may need support such as helping children onto the property ladder via the Bank of Mum and Dad.
  • Home improvements – houses lived in for many years need updating or repairing or may need to be altered to accommodate new disabilities brought on by the homeowner’s aging years.

Next steps

LiveMore offer a full range of mortgage products for borrowers over 50. From capital repayment to interest only, retirement interest only and lifetime mortgages (equity release).

We are strong advocates of not only ensuring that older clients go through full affordability to receive the right product, but also in making it easy for brokers to make their recommendation.

Our portal enables brokers to key information once, and see all available options for over 50s borrowers. You can get started with our affordability calculator by following this link.

For adviser use only. Please note this content has been supplied by our lender partner and as such, is their responsibility. No party shall have any right of action against Legal & General in relation to the accuracy or completeness of the information in this article.