Size Of Opportunity
According to CML Economics, there were just over 1.5m pure interest only mortgages outstanding as at the end of 2016 and an estimated 1.35m at the end of 2017. Whilst the total is dropping around 11% annually, interest only borrowers may need to take action and find a method to fund their outstanding capital.
Interest only mortgages are expected to mature in three peaks according to research conducted by credit reference agency Experian. The first, which were typically sold alongside endowment mortgages in the 1990s and early 2000s are maturing now. Crucially, these endowments have not performed as expected. These borrowers have the least time to fix their finances.
The next tranche will be borrowers whose loans mature in the mid-2020s, just 5 years away. Typically, these borrowers are less affluent, and borrowed pre-financial crisis – lending criteria at the time enabled them to borrow many times their salaries, according to Experian.
The final peak will come in the early 2030s when those who took out an interest only mortgage in the lead-up to the financial crisis will see their loans mature. These borrowers face an even bigger problem – not only did they borrow with high interest rates, but as they borrowed at the top of the property market, they have little equity in their property. Whilst Experian estimates that around 12% of all interest only mortgages are currently in negative equity, time is on their side to put their finances in order.
Older borrowers facing interest only maturity can be segmented into one of 4 categories:
1. The fortunate few – clear and cheer
For some borrowers, they took out an interest only mortgage, and have enjoyed the low repayments that enabled them to buy the house they always wanted. They’re able to clear the mortgage through savings they’ve built up over the years, a lump sum from their pension or other means such as inheritance. For these, clearing the mortgage will leave them asset rich and debt free.
2. The lucky choosers – paying off interest, with a low LTV
Successfully paying the interest and a low LTV gives these people choice. Whilst the borrowers may not be able to repay the capital sum, good levels of affordability means that they would have access to products such as our 55+ Mortgage. The low LTV means that equity release products such as our Flexible Lifetime Mortgage are also an option if they wish to benefit from more product safeguards such as security of tenure for life.
3. The marginal middle – higher LTVs
If LTVs mean that equity release is not possible, the ability to afford an interest only later life mortgage is the key factor to enable the borrower to keep their treasured home. For some, who can afford to make modest overpayments, this may be a temporary solution in order to reduce the LTV to levels where equity release is a future option. Bear in mind that equity release LTVs increase with age, helping this transitional arrangement to be effective.
4. Beyond help – high LTV
For the unfortunate ones with LTVs in excess of 60%, product choice for later life borrowers becomes much more limited, and affordability must be good. Thankfully, this segment appears to be small, with these highest risk maturities comprising less than 1% of the total market.
Advisers can help clients by identifying these scenarios as early as possible in order that a more holistic review of their circumstances can be considered.
At Hodge Lifetime, we’ll always review each case on its own merits so talk to us about your client’s circumstances and needs. As experts in later life lending with over 50 years experience, our rich product suite provides a range of options for your clients from 55+ and Retirement Mortgage, through to equity release.