Interest-only homeowners forced to sell up
More than two out of five estate agents (43%) said the number of customers forced to sell to pay off interest-only mortgage debts has increased over the past two years, according to equity release referral service Key Partnerships. Mortgage debt issues are particularly affecting older customers trying to downsize to release cash. Key’s research found nearly three out of four (73%) would-be downsizers are paying off mortgages.
A survey earlier this year by NOW: Pensions found that nearly four in ten homeowners (39%) think that unlocking housing wealth will be crucial to fund their retirement, with a quarter expecting to have no private pension savings at all.
Use of interest-only mortgages is falling, according to the Council of Mortgage Lenders (CML), dropping by more than a third since 2012. However, around 10,000 borrowers a year between now and 2020 will come to the end of interest-only loans, with either a projected shortfall from their repayment strategy or no strategy at all.
Options to remain in the family home, such as lifetime mortgages, are still relatively lightly used. The survey found that only 50% of estate agents believed they know enough about the plans to suggest them to homeowners.
Will Hale, director at Key Partnerships, said: “Selling up to pay off an interest-only mortgage can make financial sense but it is worrying if older homeowners are being forced to sell and are not aware of all their options. Equity release enables people to stay in their home and not have to downsize, or even in extreme cases lose their house. Some lenders are engaging with equity release as a solution and we would urge others to follow.”
Equity release products have become more flexible, with homeowners now able to take the loan in tranches, for example. Interest rates are lower and some will include an ‘inheritance protection’ feature. See YourMoney.com’s Equity release guide for more information.
However, equity release has its downside. Interest is added to the loan and builds up quickly over time, reducing the value of the homeowner’s estate. This can be a problem for those who want to leave a legacy for their children. While equity release can reduce the value of an estate for inheritance tax purposes, taking a scheme earlier in life can see interest mount up and it is better to defer where possible.
Other options may be to use a conventional mortgage. Banks increasingly allow mortgages that run until the homeowner is in their 70s. This also has drawbacks, as homeowners will have to meet income and spending criteria at a time when their earning capacity may be slowing.
The key for those with an interest-only loan is to have a plan in place for when the loan expires so they are not forced sellers when the loan expires. The housing market has slowed in recent months and may no longer be as reliable a source of wealth.