Interest Only mortgages have been hitting the headlines once again. This time after our regulator, the Financial Conduct Authority (FCA), have carried out a thematic review on interest only across the market.
The report highlights that 2.6m residential interest only mortgages represented 29.4% of all residential mortgages in December 2011. It is also estimated that 12% of residential interest only mortgages are currently in negative equity (value of property less than the loan borrowed).
Most believe that in the height of the 2007/08 market boom, many interest only mortgages were taken out, without a repayment vehicle in place (historically endowments, more recently ISA’s, etc). But with so many not having plans in place, this is a potentially huge problem on the horizon for the FCA and lenders to deal with over the coming years/decades.
For a customer to get to the end of their mortgage term and still owe exactly the same as when they took it out, with no form of repaying the loan apart from selling their property, creates a major headache for the lender, especially when they want their money back! This is also part of the reason as to why so many lenders have recently moved away from interest only all together.
In addition, most high street lenders will only lend until normal retirement age, so those looking to extend their loan beyond normal retirement age, may only find a small number of mortgage lender options.
However, some lenders are seeing this as an opportunity. One such lender has targeted the over 65s and provided a solution to the ‘lending in retirement’ conundrum. As long as the loan is below 50% of the property value, affordable within 4 x salary/pension/income with £150k equity in the property, then a long term interest only mortgage may be possible (not equity release).
This may also apply to those who, whilst having no mortgage, have suffered from reduced income and need to review options. Product innovation is providing schemes where equity can be turned into a mortgage and where off-spring may be able to assist with the repayments in order to secure and protect their inheritance whilst also ensuring a comfortable retirement for their parents. This is not right for everyone but it is certainly worth talking to a qualified advisor to review all possibilities.