Interest only mortgages driving equity release boom

The number of homeowners finding they have no way of paying off their interest only mortgage is driving a boom in the equity release market it is claimed.

A new report has revealed 1 in 5 people seeking equity release on their home is doing so because they have no plan in place to pay off the capital of their interest only loan as it comes to maturity.

Demand

Dean Mirfin, technical director of the firm which produced the report, said: “With more than one in five releasing equity from their homes to repay mortgages as the first major wave of interest-only mortgage maturities hits, it is certain that demand from people facing capital repayment deadlines will look to equity release as a solution.

“That makes it even more important for mortgage lenders to start engaging with equity release as a potential solution for their customers. Many are, but unfortunately not enough.”

Popular

Interest only mortgages were popular in the 80s and 90s when most people took out an endowment savings policy to pay off the capital when the loan matured.

But millions found themselves in financial trouble when the endowment policies did not make enough interest to meet their commitment.  Many were able to obtain compensation because of the mis-selling of the endowments and were paid enough to get themselves back on track.

Others were less fortunate and had to take out a new repayment mortgage to cover their shortfall.

Resurgence

Interest only fell out of favour for a time but then had a resurgence in the early years of the new century when the financial crisis started to make it difficult for borrowers to meet the monthly repayments on their ordinary mortgage and they re-financed with an interest only loan.

Many of the new borrowers put a plan in place to pay off the capital at maturity, but a surprising number did not and it is these people who are now turning to equity release to find the money they need.

The number of release plans jumped by 17% in 2016 with the value soaring by 26% to £2.15 billion. Borrowers in the 65 to 69 age group were the fastest growing group.

Three phases

The Financial Conduct Authority (FCA) says this is just the first of three phases they expect to see over the next couple of decades.

This one will run through to the end of next year with the next following in 2027/28 and the final phase starting in 2032.

Shortfalls

Exact numbers of those involved are difficult to estimate, but the FCA reckons there could be as many as 1.8 million with shortfalls ranging from an average £21,200 to as much as £50,000.

They are so concerned about what may happen that they have launched a new thematic review into how lenders intend to treat borrowers who find they cannot repay the capital on their debt.