Mortgages lasting into retirement, paid on an interest only basis, could be re-introduced to the UK under proposals outlined by the country’s financial watchdog.
In a consultation document the Financial Conduct Authority (FCA) says that these kind of home loans could be a cheaper alternative for older home owners but it is unlikely to sanction a return to loans with compound interest over many years which can hugely inflate the cost.
Instead it is proposing a ‘lifetime’ mortgage that would offer more choice. It has been prompted to consider the move due to an increase in borrowers selling their homes or looking at more expensive equity deals.
The consultation document says the new interest only loan would allow pensioners who cannot afford to clear the capital on their current mortgage to continue with the loan with interest paid on a monthly basis with the loan being repaid on death or move to residential care.
‘Retirement interest only mortgages have significantly different risks compared to lifetime mortgages. In particular, they do not feature the roll up of interest, meaning that consumers are not at risk of rapid equity erosion and the subsequent reduction of funds available for a bequest,’ the consultation says.
The FCA pointed out that the home owner must still be able to afford the ongoing interest payments, but ultimately the loan is repaid through the sale of the property. ‘We do consider that there are some risks associated with lending with no fixed term and we are proposing to add a small number of additional requirements for the sale of these loans,’ the consultation paper adds.
The idea has been widely welcomed in the industry. ‘It will widen the choice for consumers quite considerably because there are some lenders who would like to offer this product at the moment but don’t feel they can. Older borrowers are currently restricted to equity release, or a small number of lenders who are unlikely to offer them the best rates,’ said Ray Boulger, a mortgage analyst at John Charcol.
Charlie Blagbrough, policy officer at the Building Societies Association, pointed out that the important thing is that the proposal recognised that these mortgages would be different from lifetime mortgages as they do not lead to housing equity being eroded.
‘This proposal to take retirement interest only mortgages out of the lifetime mortgage definition is a welcome move from the FCA. For some customers, sale of the property on death or moving into residential care may well be an appropriate capital repayment vehicle,’ he explained.
‘If they have sufficient retirement income to meet affordability from a pension, rental properties or other sources to service the interest on the mortgage rather than rolling it up, then this product offers a great solution,’ he pointed out.
‘Currently a couple of building societies offer these mortgages. If this change leads to more such products on the market, providing consumers with greater choice in their retirement years, then that can only be a good thing,’ he added.