Chris Prior is manager, sales and distribution at Bridgewater Equity Release
I’m not sure who came up with the phrase ‘interest-only timebomb’ – a quick Google search of it doesn’t give any definitive answers – but it appears to have become an accepted part of the mortgage market lexicon from around about the start of 2012.
The Council of Mortgage Lenders (CML) were certainly suggesting the issue was somewhat overstated back then however the tide of opinion, and I suspect the sheer weight of information we now have, might persuade most people that this remains a significant problem which requires much thought and action to deal with.
Certainly, given the numbers of residential borrowers with interest-only mortgages, the regulator itself has been keen for mortgage lenders to be particularly proactive with those customers. The FCA has wanted to ensure all interest-only borrowers are contacted by their lender in order to secure information on how they intend to pay off their mortgage and the repayment vehicles they have in place to do just that. While the lenders are committed to this, it would seem that some borrowers are not overly keen to talk – in the middle of this year it was revealed by the CML that under a third of borrowers had responded to lenders on this issue.
Let’s hope these customers are not simply burying their heads in the sand because, at the end of the mortgage term, the capital will need to be paid and it is quite obvious that lending into retirement is no longer the option it once was for many borrowers. Indeed, if we are to look at some recent research from Saga Personal Finance we can see that the ‘timebomb’ is still ticking and the sound is probably getting louder, particularly for those over the age of 50 with an interest-only mortgage.
Saga’s research revealed that 6.3 million over-50s have an interest-only mortgage and that more than two-thirds of them, who were intending to pay the capital off via an endowment policy, say the policy is not performing well enough to cover the sum. When asked how these borrowers would make up the shortfall, a third said they intended to sell their home while the rest had other plans. Of those who were going to choose alternative options, 33% said they would use their savings, 22% said they would be making capital repayments in the forthcoming years to reduce the debt, 18% said they would use other investments, and just over 10% said they had already extended their mortgage term.
In terms of numbers, Saga said that leaves a huge 1.7 million people expressing the view that they had no way of funding the shortfall. It is perhaps no wonder therefore that we are seeing the mainstream mortgage lenders looking for potential options in order to help these customers. You will no doubt have seen the news that Santander is planning to offer lifetime mortgages from next year with this being a move specifically for those customers coming to the end of their interest-only mortgage terms.
As I’ve said before, this is a significant moment for the equity release market given that the sector has not really had a mainstream, household name/brand, offering the products for some time. We can also be sure that if Santander is moving down this route, then other mainstream lenders will be in exactly the same boat and will also be looking at how they can deal with their interest-only borrowers.
Of course, the important point for those interest-only borrowers in this position is to not simply take their existing lender’s product offering straight away. Advice is absolutely critical in this area because customers need to ensure they are securing the right product for them – it may well be that, for example, a home reversion or lifetime mortgage from another provider is much more suitable for a Santander interest-only borrower. However, that customer is only going to know this if they are aware of where they can go for advice and what issues could be raised by going along with their existing lender.
This is clearly a marketing and sales opportunity for equity release/retirement advisers to ensure customers are made aware of all the options available. It is a huge issue with some very large sums at stake – Saga’s research also revealed that four in 10 over-50s are paying off a mortgage on average of £49k; however the estimate is that 900,000 people over 70 have an average mortgage of £38k. This means this particular age group has a mortgage debt of £32.5bn.
A staggering amount and one wonders if a significant proportion of those customers might not be needing an equity release product in order to continue living in their homes and having the same standard of living. For advisers, now is clearly the time to be as active as possible and to do your bit to help defuse the timebomb.