Before the global financial crisis, interest-only mortgages were the darling of UK borrowers. As house prices soared and affordability became increasingly stretched, home loans offering borrowers the option to simply pay off the interest on the loan rather than the capital as well gave people more of a chance of realising their housing dreams.
Many first-time buyers took advantage of such products to get their foot on the property ladder, but it wasn’t just new borrowers utilising interest-only mortgages. With various estimates placing the number of UK homeowners with interest-only mortgages at around the four million mark, it is clear that borrowers from all demographic groups saw the home loans as a suitable solution.
Fast forward five years and it is clear that things haven’t quite panned out as expected for many borrowers who took out interest-only mortgages. Those who hoped to use the appreciation of their property value to help pay off some of their home loan have been sorely disappointed as prices plummeted before stagnating some way short of 2007/8 prices. But whereas younger borrowers still have time to put things right, older borrowers approaching retirement and the prospect of a vastly reduced income find themselves in a somewhat more desperate situation. Such borrowers are faced with a daunting outstanding balance they have no real way of paying and are financially hamstrung from moving to a repayment mortgage as not only would it cost even more, but many banks would not sanction a switch. This could leave a whole generation of mature borrowers caught between a rock and a hard place. So are there any alternative solutions?
Equity release schemes have been touted in some sections of the media as a possible saving grace, but I remain slightly sceptical about their suitability on a widespread basis. They may well be appropriate in some cases, but many older borrowers are averse to the idea of surrendering chunks of equity in their homes to the provider and don’t like the idea of compromising their offspring’s inheritance. There are signs that this attitude may be starting to soften, but it is fair to say that the equity release market still has some way to go to shed itself of the stigma many have attached to it, fairly or not.
In the past few months, some lenders have attempted to plug the gap for older borrowers stranded on interest-only loans but for whom equity release isn’t an attractive proposition. The most eye-catching of these innovations has been a product from Buckinghamshire Building Society. It allows lending up to age 100 on an interest-only basis as long as the loan-to-value ratio is no more than 40 per cent. Even the maximum age criterion is welcome in itself as many lenders have been reducing their limits to 65 or 70 at the most. If take-up of the Buckinghamshire product is solid, I would expect more lenders to follow suit and tailor solutions for mature borrowers on interest-only mortgages.
Being a high-net-worth brokerage, a lot of our business is conducted through overseas and private banks as high-street lenders have neglected the sector in pursuit of more ‘vanilla’ mortgages. Private banks are often not constrained by the same box-ticking criteria as their mainstream counterparts and are able to be more flexible on issues such as age and income levels given that many clients have wealth aside from their homes that can be used as suitable security. Admittedly wealthy borrowers are not faced with the same set of circumstances facing those less well off, but the private banks are still picking up a lot of business that otherwise would have seen a client selling up or entering a scheme with unfavourable lending terms.
All in all, it is encouraging to see a handful of lenders displaying innovation and flexibility in their lending terms, but it is just the tip of the iceberg in terms of what is required. Here’s hoping more banks step up to the plate or we could we faced with a full-scale crisis.
By Hugh Wade-Jones, director of Enness Private Clients