Equity release should be considered as part of a holistic view to debt, writes Peter Welch, head of sales and distribution of Bridgewater Equity Release
Few products in financial services have endured as dramatic a fall in popularity as interest-only mortgages have in the past few years. From being the flavour of the month before the credit crunch for their ability to help homeowners reduce their outgoings through only having to pay the interest on the amount they borrowed, they soon became a scapegoat when things turned sour and appear to have been filed alongside sub-prime mortgages as symptomatic of the days of free and easy lending to customers with an unsuitable credit profile.
The Financial Services Authority has been vocal about its distaste for interest-only loans, describing them as a ticking time-bomb and the dim view taken by the regulator has led to lenders toughening up their criteria for such products, with many now requiring a 50% deposit and much clearer evidence of a repayment vehicle being in place.
But while the ‘victims’ of the interest-only debacle are variously seen as prospective buyers now priced out of the products, or borrowers who took them out without a viable repayment vehicle struggling to come to terms with their future mortgage plans, little media coverage is given to those who are approaching retirement with little or no means to pay off the capital. Factor in that many lenders have reduced the maximum borrower age they will deal with as part of a wider tightening of criteria, and we have a generation of interest-only borrowers who could become mortgage prisoners unable to remortgage with a new lender and stuck with whatever their existing lender sees fit to give them, if they even authorise an extension at all.
The FSA estimates that £120 billion of interest-only loans are due for redemption before 2020, with four-fifths of those estimated to have no repayment vehicle. While it isn’t clear what proportion of those are borrowers approaching retirement, it is fair to guess they will account for a sizeable chunk and the options available to those finding themselves in such a predicament seem worryingly limited.
In fact, many pundits suggest that borrowers in such circumstances face a straight decision between taking a short-term repayment mortgage (if they can get one) or downsizing to a smaller property. This simplistic approach disregards the fact that a repayment-type mortgage may be unaffordable – which is probably the reason the borrower opted for an interest-only loan in the first place – and the fact that people may not actually want to move or are unable to because the costs of doing so outweigh any potential savings. Or simply that it is not possible to find a cheap enough property that can be bought with their remaining equity.
What many of these market commentators, and brokers themselves, are guilty of doing is failing to take a holistic view of customers’ debt in relation to their proposed lifestyle in retirement and narrowing it down to only considering the rate of interest and the amount of debt accrued with equity release products and discounting them out of hand. This doesn’t acknowledge what the customer is looking to achieve or give them the chance to decide for or against equity release if it is automatically dismissed before being discussed with them.
Equity release may not be the answer in every case, but it should certainly be a consideration in such circumstances. Brokers are going to be faced with lengthening queues from panicked interest-only borrowers approaching retirement over the next decade and simply switching to a repayment mortgage won’t be an option for vast swathes of these individuals. Equity release is increasingly being used to fund living and housing costs. So I urge all mortgage professionals to take a closer look at equity release as a possible alternative.