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Posts Tagged ‘Capital & Repayment Mortgage’

How the FCA Interest Only Mortgage Review May Impact Sales of Interest Only Lifetime Mortgages

Sunday, May 5th, 2013

May 2013 will be remembered as the wake-up call for customers with interest only mortgages. After all the talk about time bombs ticking down to zero, the FCA (Financial Conduct Authority) has now issued a regulatory warning, advising that action should be taken, and also how.


The interest only mortgage has been sold in bucket-loads for reasons a plenty. Ideally, an interest only mortgage should always have some form of repayment vehicle which is confirmed to the mortgage lender at inception.  This could be in the form of a low cost endowment, personal pension plan, regular savings ISA, stock and shares, investment bonds or even sale of 2nd home such as buy-to-let or holiday home. The only way of guaranteeing repayment of a mortgage is by choosing the capital & interest repayment mortgage route.


However, the relaxation of lending rules during the pre-credit crunch era meant that these mortgages where only interest is repaid were all too often taken due to being the cheaper option. It soon became apparent that these mortgages were not necessarily taken for the right reasons.  Not only that, where repayment vehicles were set up using pre-determined growth rates, these have fallen way short of their target growth rate.


These statistics have been confirmed by the FCA, who stated that almost half of the 2.6 million customers with a UK interest only mortgage won’t be able to clear their mortgage by the end of its term. In fact the average only interest mortgage balance will be approximately £72,000 by its eventual settlement date. These interest only mortgagors will somehow need to find this repayment amount, or end up having to sell their home and downsizing.


How Can Interest Only Lifetime Mortgages help?

This will depend upon at what stage of the mortgage term any retrospective action is to be taken. The best situation would be if remedial action could be effected during the interest only mortgage term itself. This would mean assessing the amount to be repaid & the time remaining for repayment of the original capital amount. Using a suitable interest only mortgage calculator, you can check to see how much you should be repaying in order to meet the mortgage outstanding. This will illustrate the size of the problem and what strategy is vital moving forward.


However, this is all & well if the situation can be nipped in the bud with many years remaining. Unfortunately, there are many mortgagors where the FCA interest only mortgage review has come too late. These are the people who have now reached retirement and realisation has sunk in that they still have no means to repay their mortgage. Mortgage lenders are reigning in these mortgages, many with no remorse.


Nevertheless, there is a small crumb of comfort for some as the FCA statistics do show that 85% of interest only mortgage cases maturing up to 2016 will have a 39% loan-to-value, or less. We also know from their data that over 48% people are over age 55 at this point. Fortunately for them there is a mortgage solution in the form of another type of interest only mortgage. Here is where the equity release industry can come to their aid.


Interest Only Solutions

An interest only lifetime mortgage works on the same principle as the interest only mortgage. The difference comes in the term, as the interest only lifetime mortgage will never need repaying until the last person has died or moved into long term care. Therefore, if affordability into retirement is not an issue, then committing to a life of interest only payments could prove a solution. Given the size of the interest only epidemic due to inflict itself upon the UK mortgage population this form of lifetime interest only mortgage could prove salvation for many who wish to keep their home.


The enormity of the situation could therefore be of benefit to the interest only lifetime mortgage providers such as Stonehaven, more2life and Hodge Lifetime. Where the applicants are aged over 55 and the loan-to-value criteria fits, then one of these equity release providers may be able to assist. With interest rates now closer to conventional mortgage rates than ever before, the differential in pricing is not that far apart.


In particular, where the discipline of monthly repayments are required, then the Stonehaven Interest Select Lite provides a solution whose interest rate begins at 5.99% (6.40% APR). The Stonehaven range of plans eventually rise upto 6.81% (7.3% APR) with the Interest Select Max, but offer a higher maximum lump sum.


As an alternative, if a more flexible repayment approach is preferred and the youngest applicant is 60 or over, then the Hodge Lifetime Plans may suit. The Hodge Lifetime flexible repayment option allows upto 10% of the original capital borrowed. Repayments can only start after 12 months have elapsed and a maximum of two payments are allowed each year thereafter. This effectively could provide an even better solution to interest only short fallers, as should the full 10%pa be repaid off the mortgage balance, then this would prove to be a new type of equity release scheme – a capital & repayment lifetime mortgage!


If you are one of the thousands of interest only mortgage customers with your mortgage company demanding repayment, then contact the Equity Release Supermarket team on 0800 678 5159 today or complete our contact request form.

Can I Have A Mortgage In Retirement?

Sunday, February 7th, 2010

Although many pensioners are eligible for a mortgage in retirement, many are not even considering this as an option, or even aware they could apply for one.


Equity release can be a final solution for borrowing in retirement once all other potential avenues of capital raising have been explored, however equity release can be expensive & sold all too quickly without looking at the alternatives. It is a common misrepresentation that just because people are near to, or in retirement, that they cannot raise funds via a conventional mortgage.


This is grossly incorrect.


As part of any capital raising initiative, all options must be considered & eliminated as necessary upon discussion between client & adviser. By ascertaining disposable income & the clients future intentions with regards to their property, occupation & selected retirement date the adviser can provide recommendations accordingly.


There are two ways that lenders will look at potential mortgage cases: – pre retirement & post retirement income: –

Should one still be working, most lenders will consider employment income only up to a maximum age of 65. The amount that could be borrowed would be based on a multiple of income which varies from lender to lender. It can also be based on affordability, taking into account gross incomes & making deductions for any loans, credit cards or other outstanding debt.


However, how does this affect people considering working beyond normal retirement age of 65? Not to worry, as there are still a few lenders that would permit this & this is where specialist independent mortgage advice should be sought.


For example Leeds Building Society will take into account current employment income into retirement should they be aged under 60, regardless of the normal state pension age. Leeds will actually permit the mortgage term to extend into retirement up to a maximum age of 80. The Leeds Retirement Plan must have a minimum term of 5 years and have commenced before the age of 70. For joint applicants this would apply to the oldest applicant, not like equity release which bases it on the youngest applicant. Further constraints have now been placed on the Leeds Retirement Plan product in that the maximum loan-to-value must be 50% and following the release there must still be £150,000 equity remaining in the property.


It must be stressed to the client however that  payments must be maintained & this could be difficult should employment cease prior to the end of the selected mortgage term. However, for some this could certainly be an option should their future pension income still be substantial.

For many lenders though, should the mortgage term extend beyond age 65, then only post retirement income will be considered. This could be income such as a state pension, company & private pensions & some disability benefits etc which are not reliant on employment.


However, due to the lower levels of income at retirement age, this would result in reduced borrowing power into retirement & consequently smaller mortgages. Dependent upon age, the mortgage term would be determined by the maximum age at expiry of the mortgage. Again, many lenders cautiously use 75 as the maximum expiry age. Should the lender only permit a capital & repayment mortgage, due to the short term this could be expensive.


Therefore, an interest only mortgage could be an alternative if the loan to value is below 75%. Again, access to specialist advice can result in finding lenders that can potential lend beyond age 75 & also on an interest only mortgage basis. Should adequate pension provision have been made, then lenders acknowledging this are available & will lend beyond age 75. Leeds Building Society, Godiva & Halifax’s Retirement Home Plan will fit the bill here. All three will lend to a minimum age of 85 & in the case of Halifax they will extend to a term of 40 years; more than sufficient for most!


Therefore, before rushing into borrowing in retirement, bear in mind that yes, equity release is an option, howoever is it the best option for everyone? Probably not & as surprisingly advised to some of my retired clients, (pleasing most as a result) they could be too YOUNG for an equity release! Therefore,  consider the affordability of a mortgage first, as it could be a lot less costly for your beneficiaries than an equity release plan.


For further details on mortgages in retirement & to check eligibility please contact Mark on 0800 678 5159 or email mark@equityreleasesupermarket.co.uk


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