Since the change, older interest-only borrowers have found it almost impossible to remortgage their debt because of their age, leaving lifetime mortgages – a type of equity release plan – as one of the only options open to them short of selling their home.
While April 2014 saw just 78 customers use equity release to pay-down an interest-only mortgage, the numbers are steadily climbing following the introduction of MMR. May 2014, the first month following the new regulation, saw 124 equity release customers for interest-only mortgages.
Meanwhile, this April saw the highest monthly volume of customers yet – 229 – meaning monthly customers have tripled (+193%) year-on-year.
In total, 2,246 older borrowers have used equity release to pay off an interest-only mortgage in the twelve months since the introduction of MMR.
Age Partnership reports that on average, customers released £73,980 in April 2015, and the average interest-only mortgage held was £61,846.
These customers had existing savings averaging just £13,926 – enough to cover just 23% of their interest-only mortgage debt. However, they had properties worth an average of £271,179, meaning they had enough housing wealth to pay down their debt, despite being cash poor.
Following equity release, and after clearing their interest-only mortgage, this left them with cash worth £26,060.
On average, customers using equity release to repay an interest-only mortgage in April 2015 were 69 years old – meaning they are past what may traditionally be their retirement age and will usually be deemed too old to qualify for an ordinary remortgage.
The FCA estimates that around 600,000 interest-only mortgages are set to reach the end of their term by 2020, and that half of those affected have no means to pay back the debt, meaning 300,000 borrowers could be set to become interest-only “mortgage prisoners.”
Breaking down the number of customers using equity release to repay an interest-only mortgage by region reveals that Londoners have the largest interest-only mortgages outstanding, at an average of £135,217 in 2015 – more than double the UK average of £62,180.
However, property appreciation in the capital has allowed these retirees to more than clear this debt through equity release. On average in 2015, Londoners using equity release to pay down an interest-only mortgage released £204,826 from their homes – leaving them around £70,000 in additional cash after clearing their debt.
Across the UK as a whole, the average equity released by most seeking to pay down an interest-only mortgage has risen 3% from 71,791 in 2014 to £73,873 in the first four months of 2015.
Simon Chalk, equity release expert at Age Partnership, commented:
“The interest-only time-bomb has been made all the more devastating by the affordability criteria introduced by lenders as a consequence of the Mortgage Market Review. Fewer older homeowners have the opportunity to remortgage to set up a new strategy to clear their debt. That leaves swathes of homeowners with no obvious way to clear their interest only debt whilst still remaining in their home. In the worst cases, retirees are being forced to sell-up and move to a smaller home to pay down their debt – a stressful and emotionally turbulent outcome which often causes unnecessary upset in later life. This is an urgent situation: those borrowers with interest-only deals should not be forced to abandon their life-long homes.
“The scale of the interest-only problem sets it up to be one of the biggest challenges for the older generation over the next few years. More interest-only mortgages are reaching maturity, and around 300,000 homeowners are expected to struggle to pay these back in the next five years. The unintentional side-effect of MMR is that it has created a league of interest-only mortgage prisoners unable to remortgage to repay their debt.
“Thankfully, rising house prices mean that some borrowers can use their housing wealth to pay down interest-only mortgages by simply switching to a lifetime mortgage. These cases are occurring more regularly, and can provide a way for retirees to ease the pressure of debt without leaving their homes. It’s fundamental to get the message out to retirees concerned about paying back an interest-only loan that equity release could work for them. Fixed interest rates are at record lows and plans offer greater choice and flexibility than ever before. Some modern plans include voluntary repayment options, meaning borrowers may choose to make capital repayments, to reduce the overall size of their loan, without worrying about the lender demanding proof of their income.
“Importantly, unlike with a normal mortgage age isn’t a problem with an equity release plan. In fact, it’s the exact opposite; the older the borrower, the more money they can release. These modern plans on offer can provide a vital solution for interest-only mortgage prisoners.
“Rising house prices may be the saving grace for many homeowners still saddled with an interest-only mortgage. Many areas of the UK have witnessed significant property price appreciation over the last five years, meaning interest-only homeowners are often asset-rich, despite their outstanding debt. Equity release allows borrowers who are asset rich but cash poor to unlock their housing wealth and put it to good use. Tapping into this property wealth can restore peace of mind, end a long struggle to pay down debt and provide additional cash on top – all of which can tangibly benefit a retirees’ quality of life.”
