FCA opens door to interest-only mortgages lasting into retirement
Older borrowers will have more options to refinance their home or release equity through interest-only mortgages, after a rule change by the Financial Conduct Authority (FCA).
In a bid to increase the options available to older borrowers, the regulator has redefined retirement interest-only deals as standard mortgages.
While this might seem like a small technical change, it could offer a boost to borrowers who are struggling to pay off maturing interest-only mortgages, as well as those looking to unlock equity or downsize.
We explain the changes by the FCA and how retirement interest-only mortgages work.
Mortgages in retirement: how do they work?
Retirement interest-only mortgages would allow customers to pay monthly interest payments on their loan until they die or go into long-term care. At this point, the loan will be paid back to the lender when the house is sold.
As the owner makes their mortgage payments, they repay only the interest on the loan – not the loan itself. This means that while they pay considerably less than people with repayment mortgages each month, they need to have a strategy to repay the full loan at the end of the mortgage term.
Unlike equity release schemes, interest on a retirement interest-only loan is paid off each month, not ‘rolled up’ into the loan, meaning the owner keeps a larger share of the profits when the property is sold.
You can see how retirement interest-only mortgages compare with other lifetime mortgage products – including equity release – in the table below.
How retirement interest-only mortgages compare
|Type of mortgage||Retirement interest-only mortgage||Equity release (home reversion) scheme||Lifetime mortgage|
|Monthly payment||You pay the interest on your loan each month||No payment – provider owns a percentage of the property instead||No payment – interest is ‘rolled up’ as part of the loan|
|How do you pay the money back?||Mortgage is paid back when you die or move into long-term care||Provider gets their share of the property when it is sold||Mortgage and interest is paid back when you die or move into long-term care|
|Benefits||You can unlock some of the equity in your home to pay off outstanding debt or avoid downsizing||You can access cash without any immediate repayments||You can access cash without any immediate repayments|
|Drawbacks||You’ll need a reliable income to pay the interest and your home will be sold off to repay the loan when you die or enter long-term care||You’re selling off a large chunk of your home straight away for (in some cases) significantly less than it’s worth||The debt will quickly eat into your equity as interest grows, early repayment fees could apply|
In September last year, the FCA set out a consultation paper on plans to reintroduce retirement interest-only mortgages, and now these proposals are set to become reality.
How are mortgage regulations changing?
Previously, the regulator banded retirement interest-only mortgages together with equity release schemes, collectively referring to them as ‘lifetime mortgages’.
This meant consumers were required to get compulsory advice on the different types of products and the dangers of repossession.
This advice was required despite retirement interest-only mortgages being much simpler than most equity release schemes – offering no interest roll-up, an easier sales process and requiring less advanced qualifications.
These added layers of complexity resulted in many lenders withdrawing from the market, but the FCA now hopes the reclassification will result in the return of greater choice for consumers.
In theory, older homeowners may be able to use interest-only loans as a viable alternative to equity release or downsizing, especially if they’re coming to the end of existing interest-only deals and can’t pay off the outstanding balance.
Very few interest-only mortgages are currently available to homebuyers in Britain – but an estimated 1.9 million people remain on such deals from when they were more common.
Mortgage issues for older homeowners
It can be difficult for older homeowners to remortgage their properties, with a few interest-only deals available and difficulties in getting approved for a repayment mortgage due to their age.
Standard lifetime mortgage schemes involve a new mortgage being placed over the property, and interest payments being ‘rolled up’ into the overall loan. Then, when the owner dies or moves into care, the loan is repaid from the proceeds of the house sale.
These schemes have attracted criticism for their high interest rates, which can quickly eat into any equity built up in the property.
Retirement interest-only mortgages would offer low monthly repayments (thereby placing less of a burden on retirement earnings), without some of the complexities and charges involved in equity release or lifetime mortgage deals.
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