This week, we’re going to take a look at a few ideas and discussion points about what is happening in the mortgage market for our seniors. It was not long ago that if you headed north of 50, getting a mortgage again was all but a pipe dream but the situation is a lot rosier now. One elephant, however, steadfastly refuses to leave the room – the unpaid and cannot-be-paid, interest only loan. More of that beast later.
Mortgages for those around retirement
I continue to receive an increasing number of enquiries from people approaching retirement or just past that important goal post, who need or want to borrow money. Well, the good news is that lenders are open for business.
I currently work with a panel of over 50 lenders and within that there are good double handful who actively seek such customers.
This is not equity release lending but instead we’re talking about the smaller building society or bank who are happy to lend money until a customer reaches the age of 80 or 85. Affordability remains key and the bad lending judgements of the past will not be repeated, which can only be a good thing.
Both the lender and adviser have a big responsibility to get it right. So, for many such lenders the interest only payment (notice I do not write repayment here) is fine providing, and here is the rub, there is an acceptable repayment plan in place. That may well be downsizing and selling the mortgaged property, or perhaps using a proven pension pot.
1m Interest-only loans have no way of being repaid
Now let’s return to that elephant. Interest only mortgages have been around since the 80s. Of course, many were meant to repaid by endowment policies that ultimately failed. Now, there are reckoned to be 1 million such loans that have no way of being repaid. The FCA (Financial Conduct Authority) has asked lenders to write to these customers and explore their repayment plans. I imagine many such letters remain unopened. Downsizing will not work for many, and with people living longer and poor return on savings, waiting for an inheritance is going to leave many disappointed. The future for many would appear to be bleak.
A possible solution to the interest-only challenge
However, there may be some light at the end of the tunnel. Last week it was revealed that the Financial Conduct Authority is consulting on whether to allow older borrowers to take out interest-only mortgages.
The watchdog has proposed separating out lifetime mortgages and retirement income-only mortgages after calls for change from the industry. This basically means that, at this stage, we can expect changes in this area that will simplify and categorize the current status quo, with perhaps positive results for latter life borrowers who are currently struggling.
Equity release is helping many people
This leads me to another (still maligned by a few) solution, which is Equity Release.
The basic premise with equity release is that the borrower pays no interest on the loan. This means that with rates slightly higher than normal current lending rates, the debt will double about every 12 years.
Importantly for consumers, most lenders have signed up to a charter that prohibits them taking back a property that falls into negative equity, so the borrowers will be safe in the home.
Additionally, equity release lenders are adapting, with some now allowing the payment of part or all of the interest to hold the loan in check. This is, of course, important where owners wish to pass on some form of legacy to loved ones.
Equity release advisers have to be specially qualified and many work, as I do, on the basis that this is lending of last resort.
For many, using the value of the bricks and mortar to gain some much-needed later life quality of living cash is no bad thing. I have had so much personal satisfaction from helping people with equity release advice, but I have also walked away from a number of potential customers because, for whatever reason, the plan is not for them.
What does the future hold?
I am hoping that many of the 1m interest only customers who are in a jam that many of them didn’t cause, will be given the option to explore a product that will allow them to remain in their home with some form of lifetime loan. I do wonder if more of our traditional lenders will enter this space. Repossession of many such homes will be politically damaging and serves no good economic or social purpose.
As I conclude this post, I note that a leading national newspaper is carrying an article today suggesting that soon our mortgage may well outlive us.
Those modern thinking countries Japan, Sweden and Switzerland already have mortgages on properties that are not repaid in the borrower’s lifetime, so why not in the UK? I just have a feeling, and it’s only a personal view, that equity release lending and spin-off hybrid-type loans and lifetime loans will become much more prevalent as we approach the year 2020 and beyond. Let’s see!