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 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 for these people?
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.
In these cases, options narrow:
1. Another interest only loan.
2. A Retirement Interest Only Loan
3. A lifetime Mortgage (Equity release)
An interest only loan 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) mortgage 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 rate will likely be fixed like other mortgages, the rate in the future cannot be assured. Its affordability 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 loan.
Although Equity Release comes in many “flavours” the most popular is proving to be an interest only “rolled up compound interest loan” with optional payments. These loans do not require income proofs (as payments are discretionary) and should the client not wish to, or be unable to keep up the payments, the debt will increase and be repayable when the second life leaves the property. These rates have the added benefit of being available as fixed for the lifetime of the loan and in many cases after 10 years the client 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 or you loved ones through all the options they have and hopefully provide them with the peace of mind they will require in retirement. This is lifetime mortgage. To understand the features and risks, ask for a personalised illustration. Mike Shakespeare Partner - Alexander Beard Wealth LLP