"A recent market review has suggested that the number of customers responding to their bank’s requests for consolidation plans is declining. "
The FCA has repeatedly issued warnings as to the need for suitable repayment plans, yet a recent market review has suggested that the number of customers responding to their bank’s requests for consolidation plans is declining. Moreover, with mortgages sold between 2003-2009 set to mature from 2022 onwards and the current range of repayment options available to borrowers limited (to say the least), alarm bells are beginning to ring. Downsizing offers one solution (assuming a surfeit in equity), while proposed interest-only remortgages may offer future solace, but is there another alternative?
Interest-only mortgages came to prominence during the 1980s and 90s and were originally combined with endowment policies designed to service debts at a lower cost. As these endowments began to under-perform and fall from favour, however, interest-only mortgages became increasingly popular with lower income buyers prepared to gamble on rising prices as opposed to realistic repayment plans - so much so that by 2007 interest-only loans accounted for 33% of all new mortgages.
As concerns about low levels of repayment planning began to grow in the wake of the financial crisis however and subsequent regulations grew more stringent, mortgage lenders chose to abandon the market completely, leaving an increasingly aged custom base to pay off their debts without access (in many cases) to refinance options. So, what can they do to avoid falling prey to a burgeoning interest-only crisis?
Well, the answer is quite simple; they can choose to take out a lifetime mortgage. Mortgages such as these allow customers to maintain or to ‘roll up’ monthly interest payments, thereby reducing outgoings for cash-strapped borrowers while maintaining a degree of security against missed payments or other financial problems. In addition, most lifetime mortgages offer a ‘no-negative equity guarantee’ (in accordance with the Equity Release Council), meaning that repayment levels can never exceed the value of the property (irrespective of debt ratios), while the ERC also guarantees an upper-limit cap on variable interest rates.
Recent figures released by Key Retirement Solutions have revealed that the number of customers releasing equity to furnish or settle outstanding mortgage debts has now grown to 21% of this booming market and it’s easy to see why. The ability for low income customers to stay in their own homes while maintaining decent levels of income will undoubtedly play a major role in solving finance issues for the interest-only sector.
