The Interest Only Time Bomb – Fact or Fiction
When this headline appeared a few years ago, it may have appeared more than a little melodramatic as news stories often do. The effect of this now is starting to, in my personal experience, become more and more real.
Clients have started to be referred to me who are fully or semi-retired in the 60-75 age range. Many of these people have no repayment strategies for mortgage loans due to end very soon or have indeed already done so. The reasons for these issues are varied but the problem is always the same. Lenders declining to increase the term of the loan and anxious people with few options.
So, what are the options?
1. Pay off the loans with other assets is the most obvious.
2. Downsize to a cheaper property and repay the loan.
3. Ask relatives for help.
4. Re-mortgage to another lender on a repayment basis.
Reading through that list you might imagine most of these people who are enquiring have already considered these options for themselves.
The question therefore is what choices are there for clients for whom these options either do not apply, or who do not wish to leave their current home or area?
The field does narrow but there are a number of options of another interest only loan:
1. A standard interest only mortgage
2. A Retirement Interest Only Loan
3. A Lifetime Mortgage (Equity release)
A further interest only mortgage is likely to create the cheapest monthly immediate option. The downside is this is merely ‘kicking the can down the road’ until the maximum term of the new lender is reached, at which time the lender requires repayment once again. If no guaranteed method of redeeming the loan is available, selling the house may again be the only option.
A Retirement Interest Only (RIO) Loan solves this issue as the loan has no capped end date, as long as the clients can remain resident in their home. Although the initial interest rate payable will likely be fixed like other mortgages, the rate in the future, and therefore the amount of the monthly interest repayment, cannot be assured. The lenders affordability assessment is also based on the income of the last survivor, so when one party dies the other must have sufficient income alone to cover the monthly interest repayments. The loan itself is usually paid off when the property is sold, or where the last survivor moves into care or dies.
A Lifetime Mortgage differs to a RIO Loan in that there is not always a requirement to make monthly interest repayments. This means that the lender would not require the applicants to prove the affordability of the repayments. Although Lifetime Mortgages come in many ‘flavours’ the most popular is proving to be an interest only ‘rolled up compound interest loan’ with optional payments. As this suggests, some products will allow the borrower to make optional payments but is not required to do so. Where no interest repayments are made, the interest is ‘rolled-up’, or ‘added’ to the outstanding loan which will ultimately lead to a larger debt. The option to make payments helps the borrower to reduce the amount of additional debt that builds up but gives the comfort of knowing that if income is tight, they do not have to make any repayments for the ‘life’ of the mortgage. As with a RIO Loan, the full debt is usually repaid when the property is sold, or where the last survivor moves into care or dies.
Lifetime mortgages can have the added benefit of an interest rate that is fixed for the lifetime of the loan and in many cases after 10 years the client will have the option to downsize without penalty if circumstances change or immediately if one party passes away.
This is undoubtably a very complex area of advice, but at Alexander Beard we are fully equipped to guide you through all available options and hopefully provide you with the peace of mind you will require in retirement.
Alexander Beard Wealth LLP, an Appointed Representative of Alexander Beard Investment Management Ltd, which is authorised and regulated by the Financial Conduct Authority (No.225566).
You may lose your home if you do not keep up your mortgage repayments.
Alexander Beard Wealth LLP charges a minimum fee of £295 for mortgages and £1,000 for Equity Release.