The average customer using equity release to pay down their interest-only mortgage was 70 years old in 2015
The number of customers in the UK using equity release to repay an interest-only debt has seen annual growth of over two thirds (68%), rising sharply from 1,605 in 2014 to 2,697 in 2015, figures from Age Partnership show.
Following the tougher criteria introduced by the Mortgage Market Review (MMR) in April 2014, growing numbers of interest-only borrowers are struggling to extend the length of their mortgage to clear their debt due to being deemed too old. More of these borrowers are now turning to equity release as the solution to this problem.
Simon Chalk, equity release expert at Age Partnership, said: “For the millions of homeowners who bought their homes with an interest-only mortgage the arrival of the Mortgage Market Review will have undoubtedly shaken up the future of their finances.
“Many of these borrowers will have been attracted by the lower monthly payments on offer through this form of mortgage – which excludes any regular repayment of capital, making property ownership affordable to them.
“We have clear evidence emerging that the MMR has meant hundreds of thousands of older borrowers are struggling to find a repayment option. They simply don’t fit the bill for lenders anymore, as mortgage lenders have imposed much stricter lending criteria on their customers.”
Chalk added: “This is especially the case among the older generation of borrowers who face reluctance from lenders to extend the term, or remortgage their debt once they reach a certain age, regardless of their financial position. For these interest-only prisoners, options such as a Lifetime Mortgage could provide an age-sensitive solution and allow them to dip into their housing equity to pay off the remaining debt.
“We have not only seen a burst of over-55s turning to equity release, such as lifetime mortgages, as the impending maturity of their interest-only mortgage looms, but we are also seeing more customers with higher levels of non-mortgage debt.
“These factors – individually or combined – present a significant concern and reflect the need for a review of the market with a focus on the older borrower who is unable to go down the more traditional route of remortgaging.”
Breaking down Age Partnership’s figures by quarter reveals a notable peak in the number of interest-only customers using equity release after the introduction of the MMR. Q1 2014 – pre-MMR – saw just 45 customers use equity release to pay down their interest-only mortgage. By comparison, the same quarter the following year (Q1 2015) – post-MMR – saw 510 customers: over ten times more than before the MMR was implemented.
The increase sits within a trend of steady quarterly growth in the number of interest-only prisoners using equity release to clear their debt, with total customers reaching 775 in Q4 2015 alone – the highest quarterly total to date.
In 2015, the average customer had £66,035 in outstanding debt from their interest-only mortgage. This was almost a fifth (19%) more than the average customer in 2014 who owed £55,397. Customers in 2015 also released 10% more equity with an average of £76,810, up from £69,617 in 2014, reflecting how growing numbers of customers with larger interest-only debt are turning to equity release as alternative means of repayment.
On average, customers using equity release to repay an interest-only mortgage in 2015 held £13,392 in savings. After releasing equity from their homes and clearing their interest-only debt, they were left with an average of £24,167 in additional cash.
The figures also reveal that equity release is becoming a more attractive option for customers with greater housing wealth. The average customer had £313,297 in housing wealth in 2015, almost a fifth (17%) more than the £267,456 recorded in 2014, showing that borrowers with higher housing equity are turning to equity release. In part this has been helped by house price rises across the country; there was a 5% house price increase recorded between 2014 and 2015 in England and Wales[2]. Equity release is allowing customers to tap into this growing source of wealth whilst clearing their debt.
The average customer using equity release to pay down their interest-only mortgage was 70 years old in 2015, a year older than in 2014. This further suggests how the tougher affordability measures implemented by the MMR mean that older borrowers are being pushed out of regular mortgage products as a repayment method and are turning to other solutions such as equity release. This also comes as people are typically working longer and have more freedom over their pension pots, raising questions over age restrictions implemented by lenders.
Regions
At a first glance, regional variations among customers show a less promising outlook for interest-only borrowers living in London. The average size of interest-only debt in the capital was £127,084 in 2015: almost double (+92%) the average outstanding mortgage in the UK.
This also starkly contrasts with debt holders in Northern Ireland who have an average of only £20,500 outstanding interest-only mortgage: 69% below the UK average.
However, despite the high levels of debt held in London, the average equity released by customers in the region was £178,285 – over double (+132%) the UK average – reflecting how regions with expensive properties can benefit from this asset by clearing more debt using equity release. This is followed by the South East where the average customer released £100,394 of housing equity in 2015.
Chalk said: “Rising house prices are more often than not seen as a negative for aspiring homeowners who are repeatedly being knocked down a peg. However, for those counting down the days until their interest-only mortgage looms large for repayment with no plan in place, these headlines will come as music to their ears. This is especially the case in areas with strong competition for properties, such as London and the South East, where homeowners will be sitting on potentially their greatest asset – their home.
“For those unwilling or even unable to go through the process of downsizing, extracting cash from their existing housing equity can not only alleviate the mortgage debt built up, but also leave some additional cash to enjoy in retirement.”
