Cross industry collaboration a must to help interest-only borrowers
Bruno Meiller, director products and direct customer channels, Legal & General Home Finance
Interest-only (IO) mortgages continue to present a significant challenge for consumers, the mortgage industry and financial advisers alike.
While the number of loans is falling as maturity is reached – down 13% in 2018, UK Finance has estimated that there are still around 1.23 million IO mortgages active in the UK.
This means there are potentially thousands of borrowers who may need help in finding a solution to pay off their loan at the end of its term.
So, what are the options available to IO mortgage borrowers wishing to repay these loans and why, for some, are they unable or willing to take them up?
There are often good reasons that some of the more obvious funding options are dismissed by IO mortgage customers.
Some may want to stay in the home they know and love, rather than selling it to repay the debt as they had originally planned at outset, often up to 25 years ago.
Others may find current affordability criteria makes it difficult for them to remortgage with mainstream providers, though is improving.
In light of these issues, the regulator has called on lenders to do more to help these customers.
The industry has responded accordingly with many mainstream mortgage lenders raising their traditional borrowing age limits from 70 or 75 to 80 or in some cases even to 90 years of age.
These are welcome changes, but there is still more the market can do to support IO borrowers.
House price growth saw older homeowners unlock £3.94bn of property wealth in 2018 while Equity Release Council data shows that more than 20,000 over-55s released nearly a £1bn of housing equity in the first quarter of 2019 alone.
The significant growth in the lifetime mortgage market has not gone unnoticed.
Advisers are acutely aware of the growth in the lifetime mortgage market and the role of property wealth in funding the retirement income needs of their clients – yet many don’t advise in this sector of the market.
While more consumers are turning to the ‘pension they never knew they had’ to enjoy a colourful retirement, some are doing so out of necessity.
Three-quarters (76%) of Equity Release Council members have reported that paying off mortgage debt was a key consideration for borrowers aged 55-64 who released equity.
Innovation and collaboration
Clearly, IO mortgage holders have a specific need, so what is being done to support these customers?
Whether it’s partnerships with banks or product innovation, the lifetime mortgage market continues to take steps to help IO borrowers.
Cross-industry collaboration with advisers, and the ongoing development of new options, is vital if the industry is to help the thousands of borrowers who still hold interest-only mortgages.
As more IO borrowers consider using housing equity as funding, the industry continues to innovate and bring new solutions to market to meet this demand.
Interest repayment products, such as Legal & General’s Optional Payment Lifetime Mortgage, have given these homeowners a new way to continue paying their monthly interest and so remain in their homes.
Indeed, over the last year, the number of interest-serviced options available to these borrowers has grown dramatically, with nearly four times as many options available now than before.
Across the equity release market providers are coming together to support these borrowers too.
As a leading provider of lifetime mortgages, Legal & General Home Finance has launched partnerships with RBS, NatWest, The Co-operative Bank, Santander and Virgin Money to help bridge the customer journey from interest-only to lifetime mortgage.
We must however recognise that lenders alone can’t operate in isolation to meet the challenge presented by IO mortgage repayment.
Advisers also have a key role to play in resolving the legacy issues of interest-only mortgages.
With a population that is getting older and with £1.8 trillion of housing wealth owned by Britain’s over-55s, the lifetime mortgage industry needs more qualified advisers in the market.
Not only is there strong customer demand for lifetime mortgage advice services, there’s also a significant opportunity for advisers to diversify their business model and grow their businesses.
Despite this, many advisers have yet to seize the opportunity that this market offers.
Even though the lifetime mortgage market has continued to grow and customer awareness has improved, many people remain unaware of equity release as an option to help them fund their retirement income needs.
This is where advisers have a vital role in dispelling myths and misconceptions surrounding lifetime mortgages, while increasing their clients’ awareness of their retirement income options.
That’s why Legal & General remains committed to supporting the intermediary mortgage sector, through a series of workshops, online tools and support materials designed to help advisers kick-start their equity release conversations.