Can Equity Release Help Repay an Interest-Only Mortgage?

With the use of equity release surpassing £3 billion in 2017, an increase of 120% since 2016, could equity release for an interest-only mortgage be a solution for some of the estimated 1.7 million customers who need to repay their loan?

This issue is particularly worrying considering that 200,000 of these customers have their mortgages maturing within two years, with many now in their 60s, 70s and beyond.

With interest-only mortgages, the borrower agrees to pay the interest each month but makes no capital repayments. Borrowers are expected to have some form of repayment vehicle in place, whether that be an investment, lump sum or endowment policy. However, shortfalls from these repayment vehicles can often be attributed to mis-selling, poor performance or, in some cases, borrowers simply never setting anything up.

What are the options?

Many borrowers may be considering the recently introduced products from mortgage lenders such as Hodge Lifetime, which offer lending into retirement. However, these products will only go so far, as affordability assessments, provable repayment plans and minimum equity requirements still apply.

Similarly, a lack of pension planning has resulted in small pension pots, declining annual pension incomes and one in eight retirees in 2018 retiring with no private pension at all. Therefore, with consumers facing retirement while still carrying substantial mortgages, how will they fund these when their income is low and affordability checks continue to apply?

With this lack of pension provision, the alternative is often to downsize. However, a survey carried out by Legal & General found that poor housing availability and inflated property prices have resulted in more than 50% of over-65s stating they would not consider downsizing as an option.

This raises the question: if they cannot afford to sustain their mortgage and do not intend to downsize, what other options do they have?

Property prices have increased five-fold over the past 25 years, meaning many people now have the majority of their wealth tied up in their homes. It comes as no surprise, therefore, that many homeowners want to access this wealth without having to move.

Could equity release be the answer?

On one hand, equity release, or more specifically Lifetime Mortgages, operate differently from standard residential mortgages. In most cases, monthly repayments are not required (although they are often available as an option), meaning income multiples are generally not taken into account when determining the loan amount.

Instead, interest is rolled up with the initial borrowing, which is calculated based on the applicant’s age, health and property value.

Equity release also removes the need to downsize. As previously mentioned, the interest is added to the initial borrowing, which, although increasing the debt over time, provides peace of mind by allowing homeowners to remain in their property.

Most lenders include a No Negative Equity Guarantee on their Lifetime Mortgages. This ensures that the accumulated debt will never exceed the value of the property. However, because interest continues to accrue, it will reduce the remaining equity and may reduce the inheritance left to beneficiaries.

Borrowers may also be able to include Inheritance Protection within a Lifetime Mortgage. Although this reduces the initial lump sum available, it enables homeowners to protect a percentage of the property’s value for their beneficiaries while still avoiding mandatory monthly repayments.

Equity release products are available to older homeowners, with the minimum qualifying age typically being 55 or 60 depending on the provider, including major lenders such as Aviva and Legal & General.

At the lower end of this age range, lenders will generally release around 35% of the property’s value. Therefore, if your existing mortgage has a high loan-to-value (LTV), equity release may not provide sufficient funds to repay it.

What interest rate can you expect to be charged?

Interest rates on equity release products have traditionally been higher than standard residential mortgage rates. However, increased competition within the market has led to rates falling to below 4% (as at September 2018).

Considering that no monthly repayments are usually required, these rates remain highly competitive and, in many cases, are below the Standard Variable Rate (SVR) charged by mainstream mortgage lenders. For example, Halifax’s SVR at the time was 4.24%.

Equity release will not be the right solution for everyone, but it may be well worth considering for many older homeowners, particularly those on lower incomes who face losing their homes if they are unable to repay their interest-only mortgage.

At PF Financial, we have continued to grow and develop our understanding of this expanding market. As graduate members of the Later Life Academy, we have an excellent understanding of the requirements of older clients.

As independent advisers, we will ensure you fully understand all of your options relating to equity release, allowing you to make an informed decision about whether it is suitable for your circumstances.

Please contact us for a free, no-obligation initial discussion.

Learn more about our Equity Release services.

Alternatively, call us on 01494 778899 or email info@pffinancial.co.uk.