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their current lender about the possibility of switching to part repayment and part interest.
Networks are linking up with banks and building societies to move into this space. Just last month Sesame and the Mansfield Building Society linked up to offer a new interest-only remortgage product.
Robert McCoy, senior product and communications manager at Sesame Bankhall Group says the product helps fill a gap in the market “at a time when many lenders are withdrawing or reducing their interest-only options for customers”. But whilst mortgage rates are currently low and affordability is high some customers approaching retirement will not be able to prove sufficient income to fulfill the criteria should they look to fully refinance their property. But there are other options available to
by
Simon Chalk, technical manager, equity release at Age Partnership
The demise of interest-only lending to those of a certain age has been met with dismay by brokers as it was the saviour for many customers. Yet many mortgage brokers are unaware that the void has been largely filled with better designed (and more crucially - safer) products, delivered by the equity release sector. The reaction of mortgage brokers when we at Age Partnership explain options for paying interest or capital is one of surprise. They expect that an increasing mortgage debt is all we might offer.
Stonehaven and more 2 life offer lifetime mortgages whereby the adviser and borrower set the level of affordable interest-only payment. For example, if interest on a £100,000 loan was charged at 6% fixed for life costing £500 monthly, but the borrower could only comfortably commit half this amount at £250, then that’s fine by the lender.
them. Overpayment of their mortgage will prove useful if they look to release equity later or have a change in their personal circumstances that then allows them to remortgage.
The majority of mortgage lenders will allow a borrower to overpay by up to 10% of the mortgage amount a year and borrowers should be advised to take advantage of this whilst rates remain low. Equally if the borrower has money in a savings account it may be worth them using it to pay down their mortgage. With savings underperforming in the current climate they could get a better return in the long run.
PENSIONS For Interest-only borrowers there may be a further option but it’s not without risk. When you draw your company or personal pension you have the option
A direct debit is established for the lower sum and the loan account split into two equal parts of £50,000 interest-only, and £50,000 rolled-up interest respectively. The choice of paying from as little as £25 per month up to the full 100% of interest charged rests with the borrower and there is no need to declare income and expenditure to the lender. Naturally, the equity release adviser must undertake a robust affordability check with the client to minimise the risk of them later struggling to pay and requesting that the lender ceases collecting interest-only payments and begins rolling up instead. But at least they can switch to full roll- up voluntarily, so unlike a standard mortgage they need not fear being repossessed thanks to security of tenure being guaranteed under the Equity Release Council Code of Conduct for lender members. By definition lifetime mortgages have no term to them with final repayment of the capital sum (and any rolled-up interest element) falling due only on the death or move into care of the last borrower.
Although these plans enable borrowers to set off on a steady,
38 MORTGAGE INTRODUCER SEPTEMBER 2013
to take 25% as a tax-free lump sum which could be used to clear any capital repayment shortfall. But borrowers must be fully aware of the implications of this route. With a 25% decrease in their pensions they could struggle to maintain a decent standard of living. This in turn could lead to them having to consider one of the previous options or equity release in the future.
EQUITY RELEASE In terms of the over 55s many Interest- only borrowers find themselves in a position where they do not have the additional money to overpay their mortgage or to steer their savings into their loan. A large number also find they are unable to refinance due to their financial obligations. Lowe says: “According to our research there are around 25-35 thousand people
affordable path what they don’t accommodate is the desire to adjust monthly interest payment up or down or to repay chunks of capital without risking incurring potentially punitive early repayment charges. This is where Hodge Lifetime nicely fills the gap with their hugely flexible lifetime mortgage, whereby they permit up to 10% annual capital repayment without penalty. Although established as a traditional rolled-up interest lifetime mortgage, because the fixed rates tend to hover around the 6% mark, a 10% capital repayment once a year has the effect of actually reducing the debt that has increased over the previous year, eventually managed down to £10,000 or be repaid completely.
Add to this a ‘no-negative equity guarantee’, and option to downsize and repay the whole loan after five years without penalty, and you have a compelling argument for those in or close to retirement to take a lifetime mortgage.
At the time of writing, we await the launch of the Retirement Mortgage from Hodge, which will offer the first sub 5% fixed rate as I predicted back in Mortgage Introducer back in May.
www.mortgageintroducer.com
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