With many thousands of people in the same boat, we run the rule over their best options
The Guardian – Rupert Jones
Len and Val Fitzgerald won’t be the last people to ﬁnd themselves staring down the possibility of losing their home. The couple, from Eastbourne in East Sussex, found themselves in the spotlight last week in a case which highlights the crisis involving Britain’s interest-only mortgages after it emerged Santander had launched repossession proceedings against them, even though they never missed a mortgage repayment.
They are far from alone. There are about 1.67m interest-only mortgages outstanding in the UK. But while the Fitzgeralds face the prospect of being thrown “out into the street” according to their MP Stephen Lloyd, there are things that others can do to stave oﬀ this threat.
The wider problem
There have been numerous warnings about interest-only mortgages in recent years. Just weeks ago, the main UK regulator the Financial Conduct Authority (FCA) said it was “very concerned that a signiﬁcant number of interest-only customers may not be able to repay the capital at the end of the mortgage and be at risk of losing their homes”.
With this type of mortgage, the borrower agrees to pay oﬀ the interest each month but makes no capital repayments. Borrowers are expected to make sure they have an investment plan in place – usually an endowment policy – to pay oﬀ the debt at the end of the term. Some people face a shortfall because their investment has underperformed, while others never set anything up.
In 2013 the FCA revealed that about 1.3 million homeowners faced an average shortfall of more than £71,000. However, the situation may have improved or worsened since then. This year alone, an estimated 85,000 interest-only mortgages are due to mature, and Lloyd said: “I am sure there are tens of thousands of other families potentially facing the same desperate situation [as the couple] in the coming years, which is unacceptable.”
So what are the options?
When someone with a maturing interest-only mortgage is unable to repay the capital but doesn’t want to sell their home, their lender will sometimes agree to extend the term of the mortgage while switching the loan to a repayment basis. But for many people, the maths on this won’t work because, as they will be paying back capital each month as well as interest, their repayments will be a lot higher.
The FCA gives the example of someone whose 25-year, £125,000 interest-only mortgage is about to mature. They have been paying £313 a month, but even if their lender allows the term to be extended by 10 years and switched to repayment, they may ﬁnd they can’t aﬀord the new monthly payment, which in this example would be £1,208, assuming a 3% interest rate.
Also, as is the case with the Fitzgeralds, the borrower’s age may be a big factor. One in nine of all interest-only mortgage-holders are 65-plus. Some lenders have a maximum age at the end of the term – for example, NatWest’s is 70. David Hollingworth at mortgage broker London & Country says that if a homeowner is coming up against their lender’s age limit, this may shorten the mortgage term to such a degree that it means the payments would be unaﬀordable.
However, he adds that some lenders have upped their maximum age, while others will consider lending into retirement. For example, in July 2016, Nationwide increased its maximum age for mortgage maturity from 75 to 85. But there are limits on its largesse: only retirement income can be used when calculating aﬀordability, the maximum loan is £150,000, and the loan must be no more than 60% of the value of the borrower’s home. That and other restrictions mean that deals of this type won’t be open to everyone. Could equity release help?
Could equity release help?
For those in a similar situation to the Fitzgeralds, equity release might be a solution. This is a way to get cash out of a property without the need to move home. Typically there are no monthly repayments. Leading providers include Aviva, Legal & General, More 2 Life and Just.
The number of people raiding the equity in their home to pay oﬀ their interest-only mortgage is thought to have gone up sharply. Specialist ﬁrm Key Retirement says it is ﬁnding that 21% of people signing up for equity release are using at least some of the cash to clear a home loan.
The most common equity release schemes are mortgage-based products secured against your home and repaid when you die or go into long-term care. These are known as “lifetime mortgages”.
Dean Mirﬁn at Key Retirement says: “Typically, the most a homeowner can raise via equity release is 55% of the value of their property, but this would naturally depend on factors such as the type of property, their age and health.”
Some people with maturing interest-only mortgages won’t be eligible because their loan-to-value – the size of the mortgage in relation to its worth – will be too high. This is likely to be the case with the Fitzgeralds, whose Santander mortgage appears to be around 70% of their property’s value.
The good news is that there are a growing number of specialist products aimed at older people, including those coming to the end of an interest-only mortgage deal. There is the 55+ Mortgage from retirement specialist Hodge Lifetime, which, as the name suggests, is exclusively for over-55s, and is a standard mortgage where you pay the interest on the loan each month and retain 100% ownership of your property. Notably, the maximum term is up to the youngest borrower’s 95th birthday. The maximum loan-to-value on this deal is 60%.
Similarly, Shawbrook Bank has the 55 Plus Interest-Only Mortgage. With this, the main income earner must be aged between 55-75 at the outset and have a minimum income of £16,500 a year, and must not be older than 85 at the end of the term, and there are minimum property value and minimum equity requirements.
Family building society has a deal called Retirement Lifestyle Booster, a 10-year interestonly mortgage repaid with a lump sum at the end. With this, you can borrow up to 25% of the value of your property and use it, for example, to repay your existing mortgage. The youngest borrower must be at least 60 at the time of the application.
“It’s a hell of a situation to be in”
The Fitzgeralds are in a bad position after remortgaging on to an eight-year interest-only mortgage in late 2007. Santander said the parties had originally agreed that when the loan ended the couple would sell the property to pay back the capital – but shortly before that date they decided they wanted to extend the term.
Santander says that once a customer reaches 75 it is unable to lend beyond that point. Len Fitzgerald, 77, told his local paper he and his wife had called on Santander to extend the mortgage until they were 85, adding: “We hardly sleep. It’s a hell of a situation to be in.”
The couple are said to owe around £180,000 (their remortgage was for £178,500) on a property estimated to be worth between £250,000 and worth up to £260,000. So if they sold the house, that would leave them with only £80,000, which would not be enough to buy another home in the area. It would arguably give them a decent pot of cash that they could use to rent a property.
It’s not clear yet what will happen to the couple: a court date was set for the end of April, but Santander said it had agreed to a six-month breathing space to allow discussions to continue.