Equity Release - Interest-only Mortgage Expiring
Mark Tompson from CS Retirement Solutions talks to us about equity release.
Equity Release – Interest Only Mortgage Expiring?
What happens when you get to the end of your Interest Only Mortgage Term?
Shockingly we get a number of enquiries from people who are coming to the end of their mortgage term and they were not aware it was interest only. Interest Only Mortgages account for about 20% of the overall market. There are over a million interest only mortgages ongoing as we speak in 2020. The staggering figures is 126,000 of those are going to be coming to an end in 2020.
So if somebody has been paying the interest only on their mortgage, then bank/building society will be saying “Your mortgage comes to an end in September, we want you to pay back the amount that you owe us.” It has left many wondering what they are going to do,especially if they are coming up to retirement. Their situation in retirement is a lot different to when they were earning a lot more 15-20 years ago. So a lot of people are faced with actually losing their homes.
What should I do if I realise I am in the position of coming to the end of the interest only mortgage and I don’t have the full amount to pay off the mortgage?
In this instance many approach us for a mainstream mortgage, but as they have been paying an interest only mortgage, they are used to lower monthly payments. So quite often they are faced with a capital interest where they’re paying back some of the capital, that then becomes prohibitive in terms of the amount they’re gonna have to pay back or what they’ve got in place to pay back the money in any event. So a lot of the inquiries come from people that are just generally looking in desperation.
Is Equity Release the solution?
Equity release is not for everybody, but it is one solution. We don’t just assume in these circumstances it is the only option, so we would look to review someone’s individual circumstances.
One option is to sell the house, but many are reluctant to do this because they have been in the house for a number of years and it is their home.
Another option is a mainstream mortgage, but you have to review how you can service that payment. If you have been used to an interest only, essentially it was a lower monthly payment.
I can give you an example where recently we had a client in this exact situation. They had lived in their home for over 20 years, it had a number of fond memories and they had made it just how they wanted it over the years. Although they had both retired they had part time jobs to sustain their income in retirement. They really did not want to sell their home, but a mainstream mortgage was not an option. We discussed the idea of an Interest Only Equity Release Lifetime Mortgage. In short they could pay the interest back, or not choose not to if they wanted. They could stay in the house until the last one had passed away or went into long term care and they had some breathing room with the income they were earning. They knew they never had to pay the mortgage back until the property was fully vacated. They were very happy with this solution as the only other option was to sell the house and no other type of mortgage was available to them.
What would happen to the other person if one of them did pass away, if they’re in that equity release?
Nothing per say, the key thing that you never lose your home on a lifetime mortgage. So they basically would live there until they no longer have a need for it.
What happens when both people have passed away?
It’s like any other mortgage, the lifetime mortgage or equity release with a lifetime mortgage is just a mortgage. It’s a mortgage for life. And it’s fixed for life as well. The payments are fixed. And as with any mortgage, if the property sold the mortgage plus the interest that accrued, it’s been paid off.
Why did previous Equity Release Products get a bad reputation?
The old equity lease products were not fully regulated. They were called “home reversion plans” where people actually sold their property. So companies were buying the property. You were able to stay in the house but you did not own it, that’s not the same as having a mortgage. Home reversion plans now make up a very, very small percentage of the overall equity release market. I think it’s something like half a percent. It’s the concept of “losing the house” that people struggle with.
Now It’s just like a normal mortgage. It has to be paid with the interest. If someone is paying the interest we call that “Serviced Interest”. So if you bought for £100,000 and you service the interest you owe £100,000, if you have taken £100,000 and you let the interest compound, you pay back what is owed at that time.
What factors do lenders look at?
Generally the equity that is in your property. It is normal that they request you are over 55. Property has to be of a certain value, lenders are all slightly different, but usually a property has to be worth at least £70,000 as a minimum. The property also has to be saleable. So obviously if they grant you a mortgage for life, they will know when they get the property back that it can be sold. Generally there’s no income, so there will not be interested in income. They will also take into consideration how long they expect that client to live. So the amount they’ll lend depends on the life expectancy. So quite bizarrely, if somebody is ill and hasn’t got a great life expectancy, they can borrow more money because there’s less risk to the lender in terms of the amount of time that the mortgage will be outstanding.
What about your existing lender?
First and foremost speak to your bank or your building site to establish the position with them and whether or not they can help you. What is your exact position – it is not good guessing where you are.
Seek legal advice. People always seem to be a bit slow in seeking the proper advice. Speak to people like us, we’re here to guide and direct you to the right place. We can look at all the options and identify the best option for the client at the time. Don’t leave it to the last minute.
What about Interest Rates on Equity Release?
The rates with an equity lease vary depending on how much you are borrowing, how much borrowing against the equity, how old you are. So the rates again, the rates are different for everybody.
What does surprise people is how reasonable the rates are. Bearing in mind the historic 8-12%. There is actually a fixed rate mortgage interest, for life at 2.5%. Not every case is like that, but it demonstrates how reasonable the rates are.
Equity Release Calculators – are they a good idea?
As a mortgage professional, I don’t advise anybody doing it solely online. It is amazing how much is online, but if the wrong information goes into a calculator the wrong information comes out. I get so many people coming to me saying, well, I’ve got an agreement in principle, and I’ve got it online. Then you look at their situation you think, but you’ve neglected to put in this, that or the other.
When I’m first dealing with anybody I want them to understand what it’s about, understand the concept. So it’s an educational thing, really. Getting to really understand the point and they feel more comfortable with it, you know, quite a frightening thing to do and quite foreboding.
How long does the process take?
I think the average equity release time scale is about five weeks. That’s the average, so you can have some that take quite a lot longer than that. Sometimes it depends on the income all sorts of things come up with regarding the property our clients where they’ve looked at the property and said, actually, we have to lend you the money, but the property isn’t quite where we want it to be. So we want you to do this repair, do that repair, make that roof good.
I’ve literally also known clients get money released when they’re looking to buy a house. They can have an offer out within less than a week. So again, it’s like a normal mortgage.
Generally it is a much quicker process.
What if I have really left this to the last minute?
All banks have got a duty of care to the client. They’ve got to be seen to be doing the right thing. If they can see that you’re doing something, then there’s no reason why they shouldn’t give you more time to sort something out. I would always encourage speaking to the bank, and keeping a good dialogue with them.
We care passionately about making financial advice accessible to all, in an easy to understand and friendly manner. We aspire to raise standards in all areas of financial advice and hope to challenge any negative industry perception by offering a genuine and trustworthy service.