Regulator looks to ease pressure on older interest-only borrowers

8 September 2017
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Older borrowers could soon find it easier to access interest-only mortgages under plans announced by the regulator.

The Financial Conduct Authority (FCA) has launched a consultation paper on the issue as it believes older borrowers with maturing interest-only mortgages and no repayment option currently face a restricted choice.

The regulator says those looking to release equity from their homes without taking out a lifetime mortgage or an equity release plan are also hampered by the current regulations.

At present, there is a requirement for lenders to take into account the customer’s ability to purchase a cheaper property in the future during their affordability assessment. However, the FCA is now consulting with the industry to remove this restriction for what it calls retirement interest-only mortgages.

With these loans, borrowers have already agreed that the property will only be sold when they die or enter long term care, negating the need for them to purchase another property.

The changes are expected to open up the market and make it easier for those with maturing interest-only mortgages to access finance. Mortgage lenders have complained to the FCA that the current rules are preventing them from serving this part of the market.

The consultation period ends on 1 November and, if agreed, the rules could come into force next year.

‘There is no need to factor in the ability to trade down’

Ray Boulger, senior technical analyst at mortgage broker John Charcol, says the FCA is looking to make its rules fairer to ‘older borrowers’. This is currently defined as those aged 55 and over, an age bracket which he does not expect to change.

“These changes would make it easier for lenders to lend to older borrowers,” he says.

“There is no better repayment strategy than agreeing to sell the property when you no longer need it. There is no need to factor in the ability to trade down.”

The FCA consultation says: “We are revisiting this position because it may be restricting consumer access to retirement interest-only mortgages. For example, firms may be reluctant to complicate systems and staff arrangements set up for standard mortgage lending.”

‘You feel like you have a cloud over your head all the time’ 



Since our investigation into the interest-only market earlier this year, Moneywise has continued to be contacted by borrowers who are struggling with their loans.


 

Pam Neale (above), 64, has seven years to run on an interest-only mortgage she took out in 2009 and faces losing her home in Paignton, Devon. Her husband, the primary earner in the household, died 18 months ago and she will be unable to pay back all of the £323,000 owed. 

Pam, who runs a small business, received a letter “out of the blue” from Santander regarding her mortgage and the bank has made it clear the term cannot be extended.

 “I own some holiday lets and I’m already panicking and trying to sell them,” she says. “But even with those sold I’m going to have a £50,000 shortfall as the local property market is so poor,” she explains

Pam took out her mortgage through a broker and was told that she would be able to extend her term, but Santander is unwilling to do this. At present she has few options, something the FCA’s proposed changes are trying to address. Her situation is particularly acute as she missed a payment around the time her husband passed away. Pam says this makes it impossible for her to switch to a new provider. 

She is currently paying an interest rate of 4.49%.

“I pay £1,200 a month but the cheapest repayment mortgage they can offer is £4,500 a month. The bank should have said earlier when I would have had a chance to change things. Seven years is not enough to change things around.

She adds: “I don’t feel like anybody individually is to blame, but it needs to be addressed.  This is affecting lots of people, especially pensioners, who are being forced to sell their homes. You feel like you have a cloud over your head all the time.”

A spokesperson for Santander told Moneywise: “We are actively collaborating with Mrs Neale to help her manage her mortgage. We will continue to support her in clearing the arrears and are working towards an affordable, sustainable solution for repayment of the outstanding balance.”

Comments

In reply to by anonymous_stub (not verified)

I am 69 and single and have been working on temporary work contracts. This ended last month, March 2018. I get a government pension of £60 a week so made application for pension credit and was told I did not qualify for housing benefit as I have an interest-only mortgage of over £100,000. My monthly mortgage payment is £240. So I am forced to borrow money from my credit card to pay mortgage payments while I try to sell my house. There is very little equity in the house around £30k so unable to buy something smaller. Looks like I will need to go for a rental somewhere and claim housing benefit. Perhaps this housing benefit will pay off some investor's mortgage All very unsettling. I am of course looking for work but live 25 miles out of town so a car needed.

In reply to by anonymous_stub (not verified)

I hope the FCA decide to make it easy for people at/nearing retirement to obtain interest-only mortgages at decent rates. In fact, I wish they would look at making it far easier for everyone to get interest-only mortgages, and at the same interest rates as for repayment mortgages (i.e. no penalties).I’ve long been a fan of interest-only mortgages. I think it is really unfair that it is so hard (if not impossible) to get one now.There are a number of cases where an interest-only mortgage is a far better option than a repayment mortgage, e.g. :(a) For people with investments, it can be much more cost-effective to build up investment growth than repay the mortgage. Then either pay the mortgage back in occasional instalments when investment growth has been very good, or repay it all at the very end of the mortgage term. (b) It may be more tax-efficient to use the tax-free lump sum from a pension to pay off part/all of a mortgage at the end. (c) For (possibly younger) people who may wish/need to live in an expensive area (e.g. London) for a number of years due to their career, but intend to move somewhere cheaper in later years. An interest-only mortgage will be much more affordable than a repayment mortgage. An interest-only mortgage may also be cheaper than renting, and it also has the benefit that any gain in the value of the expensive property over the years can be used as a deposit on a cheaper property later on. (d) For other people who will not want/need to repay the full mortgage, as they may stay in the property for many years, but then would expect to sell it, e.g. either to downsize after their children have left, or to move somewhere cheaper, or to move into care in later years, etc. A retirement interest-only mortgage will be a much better option than a lifetime mortgage or any other form of equity release, and as mentioned in the article will be a great help to all those people who cannot currently extend their current interest-only mortgage.

In reply to by anonymous_stub (not verified)

We have an interest only mortgage which we are due to pay at the end of September. Our mortgage lender was Northern Rock. When they ceased operating it was then passed to a lending company Engage Credit. Like other comments from readers we received a couple of letters but no follow up.We are in process of trying to prove that we were mis sold our mortgage. The Financial Ombudsman is looking into it but doesn't seem to be getting very far.We. don't have any way of being able to repay the mortgage which is £118.000 and although I have spoken to the company they are not willing to extend. We are now in the process of trying to remortgage but can only do this for 13 years as my Husband is 72 and I am 68. If the regulater does find a solution I'm afraid this will be too late for other people in our position we really need help now.

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