Talk of an interest-only time bomb has been around for some time
Chris Prior is manager sales and distribution at Bridgewater Equity Release
There has been much talk about the potential of equity release to provide a solution for those who currently have residential interest-only mortgages, and may not have a repayment vehicle which can provide the necessary capital pay-off when the term ends.
Talk of an ‘interest-only time bomb’ has been around for some time and the latest missive from the FCA published last month tried to draw a compliance and regulatory line under any attempt by advisers or providers to ‘shoehorn’ interest-only customers into ‘more expensive’ equity release products. The assumption seems to be that advisers and providers are somehow preying on those older borrowers with interest-only loans and firmly steering them towards equity release without a bye or leave.
Now firstly I’m not aware of anyone suggesting that every interest-only borrower over 55, coming to the end of their mortgage term, and unable to pay off all the capital, should somehow be immediately ‘shoehorned’ into an equity release product. This is not the case at all and clearly, taking the advice of a specialist in this area, will mean a recommendation and about whether equity release is appropriate.
In many cases equity release will not be deemed appropriate and there will hopefully be other solutions on offer. However, the main issue for many within our sector is that equity release is given a ‘fair hearing’ and by that I mean advisers are aware of the option and have the means at their disposal to either provide the necessary advice themselves or to introduce their clients to a specialist who can make those types of recommendation.
Equity release has always been deemed ‘high risk’ by the various regulators and in this communication there again appears to be a concerted effort to ensure that borrowers look at other options. However, what this fails to account for is the fact that there will be a number of borrowers who no longer have many options, particularly if they wish to stay in their own home.
For instance, many might think of downsizing but there’s no guarantee that selling the existing home to pay off the capital of a loan leaves the borrower with enough to purchase a replacement property that they might want and/or need. Gaining a further loan, particularly if the term moves into retirement and beyond, has become increasingly difficult as lenders scale back on their lending into retirement where maximum ages of borrowers have been cut. Of course this is without the affordability tests that all potential borrowers need to meet in order to get the loan in the first place.
Therefore, equity release could be a viable option for these types of borrowers because it can release the equity in the home in order to pay off the capital and, rather importantly, it keeps the borrower in their home. Now of course we do have other options, such as Hodge’s ‘hybrid’ interest-only/lifetime mortgage product however this will only be viable for those clients who can show and prove a regular income and be able to pay off the interest every month.
As is the case in many areas of financial services this is all about providing options and potential solutions for individuals who find themselves in a particular predicament. The regulator has said that it does not envisage a flood of interest-only borrowers who will find themselves with significant shortfalls however there will be a fair number and therefore we have a duty to show them all the options available.
No-one is frogmarching an interest-only client to their nearest equity release provider and picking the most expensive product at the same time. What we are doing is offering alternative options, that the client may not have even considered, in order to deliver a satisfactory outcome for all and hopefully – where the client wishes to – keeping them in their own home for as long as they wish to stay there.