PROVIDER SUPPORT – 15
Plugging the interest-only gap
So what next? One option could be an interest serviced lifetime mortgage. Increasing consumer demand has led to much innovation in the lifetime mortgage market over recent years. There are now several lifetime mortgage lenders who offer borrowers the opportunity to service the interest. They’re designed to help those who are used to making monthly repayments and who wish to continue to pay at least some of the accrued interest each month. However, due to strict affordability requirements, they wouldn’t qualify for a residential mortgage. Unlike an interest-only mortgage, there’s no risk of repossession. If borrowers stop making their monthly payments, the interest is instead added to the amount they owe each month on a ‘roll-up’ basis and repaid when they (or last surviving customer if borrowing jointly) dies or goes into permanent long term care. With our Just For You Lifetime Mortgage, borrowers can choose to pay between £25 and 100% of the monthly interest for the duration of the lifetime mortgage. The products also include interest rate reductions based on the amount of monthly interest they choose to pay from the roll-up rate. They can borrow either a one-off maximum lump sum, or release a smaller sum initially, with the option of releasing further sums up to the amount of a pre-
The number of new interest-only mortgages sold has fallen steadily in recent years following a change in lenders’ criteria. However, there is still a high proportion of these mortgages due to mature every year until 2032. In fact, research from the Financial Conduct Authority shows 30% of existing interest-only mortgages are currently held by the over 55s. And, approximately 40,000 mortgages due to mature each year are held by borrowers who will be over 65 at the end of the term. Many of these borrowers are expected to be financially vulnerable. For various reasons, including endowment shortfalls, it’s expected the majority will not have enough capital to repay their debt, leaving them at risk of losing the home they love. Lenders may agree to extend the existing term of the mortgage, although an extension may only be granted for a relatively short period. This has the impact of delaying the inevitable as the capital balance remains outstanding and would still be due to be repaid in full at a later date. Some lenders are happy to explore the option of converting the debt to a Capital & Interest repayment mortgage. While this may seem like the simplest solution, it’s likely to be deemed unsuitable for a large number of borrowers. This is particularly the case for those who rely solely on their state pension for income and are assessed by the lender as unable to afford the higher monthly repayments.
agreed cash facility at a later date when needed. They’re able to make monthly interest payments on any further sums they choose to release. Additional features, unique to Just, include the option for borrowers to take a payment holiday of up to three consecutive months in any 12 month period. This feature is designed to allow them the added flexibility needed should they have a short-term need for additional cash. Outside the payment holiday, should the borrower miss six monthly payments, the mortgage will automatically convert to interest ‘roll up’. Another significant advantage for the client, is that all the time they choose to service a proportion of the interest, they’ll have the benefit of a reduced interest rate, compared to if this option isn’t selected. For more information visit our website: justadviser.com
Peter Borley Director of Propositions, Retirement Lending
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