In the past, banks have been forbidden to lend money to borrowers who do not have a clear repayment method. As a result, many people turned to equity release deals which involved compounding interest which could be quite costly.
However, recent reports reveal the Financial Conduct Authority (FCA) is considering proposals for an updated version of interest-only loans that run until the borrower’s death – aptly named ‘lifetime mortgages’.
What is Being Considered?
The FCA is seeking a cheaper alternative to traditional loans where people who cannot afford to clear capital debt (pensioners for example) can continue to pay only interest off each month for an indefinite period.
It believes that this would provide more choice and better rates on mortgages for over 70s as there would be no interest roll-up, and therefore has named them ‘retirement interest-only mortgages’ as part of the lifetime mortgage scheme.
It would also be useful for older borrowers whose interest-only mortgages are due to mature, but they’re unable to pay off the remaining balance.
The FCA consultation document says:
“We are revisiting this position because it may be restricting consumer access to retirement interest-only mortgages. For example, firms may be reluctant to complicate systems and staff arrangements set up for standard mortgage lending.
“Retirement interest-only mortgages have significantly different risks compared to lifetime mortgages.
“In particular, they do not feature the roll-up of interest, meaning that consumers are not at risk of rapid equity erosion and the subsequent reduction of funds available for a bequest. Consumers are also more likely to be familiar with the product features of a mortgage involving interest payments.”
Advantages v Disadvantages
Despite the well-intentions of helping borrowers and preventing thousands of homebuyers in their 50s taking out large mortgages, some experts have warned about the potential trend for ‘debt for life’ where the debt will only be cleared upon sale of the property or the borrower’s death.
Interest-only mortgages could also be offered without the borrower being required to seek financial advice, which creates risk. Despite this, the lack of ‘advice’ could mean a more competitive market and the potential for better deals.
Do You Think an Interest-Only Lifetime Loan is a Good Idea?
Whether these funds will become available is yet to be seen as the consultation is open until 1st November 2017. In the meantime, if you require a residential mortgage and have specific circumstances, get in touch with our team of specialist brokers to see how we can help.