17 October 2017

Later life lending - Interest-only mortgage customer

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How did we get here?

Interest-only mortgages have been around for a long time but it was in the 1980s, when they were commonly known as endowment mortgages, that they were sold in their millions.

Many borrowers purchased endowment policies to run alongside their mortgages. They believed that over time the value of the endowment would rise to pay off the mortgage, and perhaps even generate an additional lump sum.

When it became clear many of these endowment policies would fail to fully pay off the original loan, the popularity of endowment mortgages declined.

However, the early 2000s saw sales of interest-only mortgage rise again, peaking in 2007 before virtually disappearing after 2008's credit crunch.

These mortgages were not sold alongside any repayment vehicle and in theory, customers needed to provide proof of how they planned to eventually repay the capital during the application process.

In reality however, few checks were made.

In 2013, some lenders started contacting interest-only customers whose mortgages mature before 2020, requesting details of repayment plans.

It became clear that some borrowers had a variety of plans to repay their mortgages. These included inheritances, investments, or selling and downsizing. However, there were others who had no plans in place and would face a shortfall when their mortgage came to term.

A growing opportunity to help more people

Citizens Advice estimates there are 3.3 million interest-only mortgages in the UK. Of these, up to a million homeowners have no repayment plans in place. The average shortfall has been estimated at around £71,000.

It's estimated that up to a million interest only mortgage plans have no repayment plans in place.
Citizens Advice

Is downsizing the solution?

In 2011 the housing charity Shelter released a report that showed property prices were more than 43 times what they were in 1971. They demonstrated that this increase was far in excess of inflation. After building up such a level of equity in their property over the years, homeowners in this position could sell up, downsize and use the remaining equity to pay their original debt.

Property prices have grown 43 times between 1971 and 2011

This seems very logical and practical, but it doesn't take into account that many people would prefer to stay in their own home for as long as possible. The emotional bond to a family home is often very powerful, fueling the desire to 'stay put'.

Aside from the emotional ties, the reality is that downsizing to a smaller property in the same area may not be financially viable. The sums might not add up once the existing mortgage has been paid off and the costs of moving, particularly stamp duty if applicable, have been taken into account. Downsizing to a different area could be an option, but this potentially moves people away from friends, family and other networks. This brings us back to this desire to 'stay put'.

The possible role of a lifetime mortgage

All potential options for repaying a mortgage should be fully explored with a financial adviser. A lifetime mortgage could be a sensible and logical decision.

Lifetime mortgages aren't for everyone. They're only available a specialist financial adviser who'll tailor their advice to the individual or household circumstances.

Repaying an existing mortgage using a lifetime mortgage is becoming increasingly common, with almost a quarter of lifetime mortgages being used for this purpose. It allows the customer to stay in their family home and continue to benefit from potential future increases in property values.

The interest is added to the amount owed each month. This means interest is charged on the loan on top of any interest already due therefore the amount owed will grow quickly, reducing the equity left in the home. This is something that's important for customers to understand.

The lifetime mortgage is usually repaid from the sale of the customer's home when the last surviving borrowers dies or goes into long-term care. There may be cheaper ways to borrow money.

At Legal & General, there are additional protections available for customers as our Lifetime Mortgages offer optional Inheritance Protection, protecting a percentage of the home's sale value after costs. There's also the opportunity to make optional partial repayments, reducing the amount to be paid back without incurring early repayment charges.

Earlier this year we announced an arrangement to make Legal & General Lifetime Mortgages available to Santander interest-only customers, representing an important step within the industry.

We hope to provide an option to address the issue of interest-only mortgage shortfalls that allows customers to remain in their homes, as well as enjoying peace of mind in their retirement.

Find out more 

To find out more or to discuss a client, please email our support team at enquiries@landghomefinance.com

If you're contacting us by email please remember not to send any personal, financial or banking information belonging to you or your client because email is not secure method of communications.