Few issues have caused more jitters in the mortgage industry than the so-called interest only time bomb. Ever since it became clear that the endowment policies of the 1990s and early 2000s were mis-sold there has been concern over how interest only borrowers would repay their loans at the end of the mortgage term. Add to this of course the fact that such mortgages continued to be sold (in large qualities) in the run up the credit crunch and it’s not hard to see why there’s so much unease.
According to UK Finance there are currently 1.9 million interest only borrowers in the UK. Many of them will now be approaching the end of their mortgage term with little or no repayment vehicle in place. Those borrowers who took out an interest only mortgage in the years just before the economic crisis – and whose loans will be maturing during the 2020s – will likely be in an even worse position since high interest rates at the time were matched with high LTVs meaning they’re unlikely to have much if any equity in their properties.
The regulator has now launched a consultation paper on a proposed change to the market which, it believe, will tackle the problem. The Financial Conduct Authority (FCA) suggests that allowing a borrower to stay on an interest only mortgage for their entire lifetime may be less risky than a regular lifetime mortgage, as it avoids the compounding effect of interest accruing that can eat away at the value of their home and reduce the amount they can pass on to their families. The new product is to be called a Retirement Interest-only Mortgage’.
Interestingly, unlike normal lifetime mortgages, it will not be exempt from the European Mortgage Credit Directive (MCD). This means that retirement lenders who want to offer the new product going forward will have to re-tool their systems and processes to comply, whereas mainstream mortgage lenders who are already aligned with MCD will be well-placed to offer this new product.
It’s a smart move by the FCA. Indeed, anything that provides greater choice for older borrowers – currently restricted to equity release in many cases – should be welcomed and this will undoubtedly be a better option for some borrowers.