Interest-only mortgages are causing concern for over-60s
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Inaccurate endowment policy forecasts have caused problems for millions, says finance expert Peter Sharkey.
For the past few weeks, I’ve spent most weekday afternoons responding to readers’ finance-related questions delivered to email@example.com. After discussing the huge level of response with the people behind Moneymapp, we’ve decided this reader-columnist interaction should continue for the time being.
The questions have been as varied as this newspaper’s readership. A number of people have asked about proposed property investments; others have sought a view on ‘alternative’ investments such as forestry and a convertible loan note scheduled to pay an eye-watering level of annual fixed interest.
Yet by far the largest proportion of questions (more than 90pc) relate to equity release, with a sizeable number of these concerning the repayment of interest-only mortgages. ‘Concern’ seems the most appropriate noun: there are clearly hundreds of thousands of people in their sixties and seventies who do not have the means to repay interest-only mortgages.
This year alone, more than 82,000 interest-only mortgages, worth £9.7 billion, are scheduled to mature, presenting many homeowners with the prospect of having to repay their loan in full.
Interest only mortgages became extremely popular during the late 1980s / early 1990s as they allowed people to buy their homes while keeping monthly repayments relatively low. The means by which these mortgage would be repaid was usually an endowment policy.
Monthly contributions to endowment policies were invested in shares and property; at the very least, they were forecast to eventually repay the borrower’s interest-only mortgage. In addition, many borrowers were told that as their contributions would be supplemented with a combination of guaranteed and annual bonuses, the policy would almost certainly produce a handsome cash surplus.
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Unfortunately, endowment policies were mis-sold by the lorry-load in a commission-induced frenzy, while forecasts of how they would perform over a quarter century were, at best, reckless.
By the early 1990s, more than one million endowment policies were being sold every year; once the penny dropped, however, and their forecast returns were revealed as the work of fantasists, sales tumbled. By the turn of the century, fewer than 100 annual sales were recorded.
Regrettably, the legacy of endowment policy mis-selling remains; if my mailbox over the past few weeks is a guide, there are plenty of people who are worried about how they will repay their interest-only mortgage.
There are, however, a handful of alternatives available to homeowners, many of whom probably didn’t expect to be over-concerned about their mortgage when they reached their sixties or seventies. Fortunately, these folks are mostly of an era when, if problems arose, you roll up your sleeves and tackle it.
Of the mainstream alternatives available, it’s possible, therefore, that one of the following will offer a solution.
Switch to a repayment mortgage. Many lenders are prepared to switch borrowers with interest-only mortgages onto a repayment type. However, because the new form of mortgage combines capital and interest, monthly payments will increase significantly.
Extend the mortgage term. Some lenders will consider extending an interest only mortgage, usually when they’re given assurances that borrowers will raise funds elsewhere to repay the mortgage or prepare their property for sale. Once sold, the interest-only loan is repaid.
Downsize. For some people, this is the least palatable option. Many have lived in their home for years, raised family there, made friends and are involved in the local community. Nevertheless, as their home’s value has probably risen several-fold, selling and moving to a smaller, cheaper home, is a way of solving the interest-only mortgage dilemma.
Equity release. My mailbox contained more questions about equity release than anything else. Releasing wealth from your home, usually built up over many years, can provide the ideal solution as it may: a) repay an interest-only loan and b) ensure the homeowner has no further monthly repayments to make.
You can obtain an estimate of how much can you could release from your home by visiting: https://www.moneymapp.com/the-equity-release-calculator.
Simply enter your age, the approximate value of your home, contact details and, if you’re eligible, the calculator will provide an estimate of the amount of money you could release.
This method of repaying an interest-only mortgage will not suit everyone, but then neither will any of the alternatives listed above. However, homeowners considering equity release should seek professional advice before taking matters further as a qualified adviser can detail the benefits and potential disadvantages.
A sizeable number of people are still kicking themselves for not taking proper advice many years ago when agreeing to borrow on interest-only terms. Hopefully they will not make the same mistake twice.
If you’re a homeowner concerned about how you might repay an interest-only mortgage and are considering equity release, please get in touch. Thanks again to those of you who have already emailed. Please keep the emails coming, but note I cannot advise on the suitability of equity release to individuals. My email address is firstname.lastname@example.org .
Read more about equity release: www.moneymapp.com/equity-release
Drop Peter Sharkey a line!
Such has been the response to our recent ‘Equity release: your questions’ feature that it has been extended. Readers can now email Peter Sharkey (and his team of equity release experts) to ask any equity release-related questions. Contact Peter by emailing: email@example.com
As many readers have already discovered, there’s a wealth of information to be discovered at: https://www.moneymapp.com/equity-release . In addition, there are hundreds of blogs and articles dealing with the subject on the Moneymapp website, including Peter Sharkey’s weekly blog, rated among the UK’s very best. Read more at: https://www.moneymapp.com/blog
You may still email any queries or questions regarding equity release to: firstname.lastname@example.org
Please note that neither Moneymapp.com or Peter Sharkey can advise readers on whether equity release is suitable for them. However, both Moneymapp.com and Peter can introduce readers to professional advisers who will explain the process and its implications for your estate and entitlement to means-tested state benefits.
With no stamp duty to pay, is this the time to help loved ones onto the property ladder?
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For more financial advice, check out Peter Sharkey’s regular column, The Week In Numbers.