Britain is preparing itself for a new wave of interest only mortgages even as 11,000 existing owners are in danger of losing their homes.
The new deals are being offered as loans for pensioners into their retirement and as a lifeline to those borrowers unable to pay their existing interest only debt.
As an added bonus, parents and grandparents wanting to help their children get a foot on the housing ladder will also be able to secure a loan.
Lenders are able to offer the new deals after the Financial Conduct Authority (FCA) agreed to relax the rules following an investigation of the mortgage market last year.
They found there are currently 1.67 million full interest only and part capital repayment mortgages outstanding, representing 17.6% of mortgages across the country and many of them will be up for repayment in the next few years.
It is understood that many of them have no idea how they will be able to repay the capital on their loan with a high proportion of them being older and financially vulnerable.
Under European rules, borrowers needed to be able to show they had a credible capital repayment strategy, such as savings, investments, another property or enough equity in their home to fund downsizing.
But selling their home to repay the mortgage when they died or moved into full-time care was ruled out.
This meant that even when retired borrowers were comfortably meeting their interest payments each month, they couldn’t extend their mortgage term if they were ultimately relying on the sale of their home to repay the debt.
The FCA suspended these rules in March this year, saying they had created a barrier for thousands of credit-worthy retired borrowers.
Now lenders are finalising a new range of mortgages which are expected to be launched in early 2019, but the Post Office has already revealed the market’s first ever retirement interest only mortgage. However, it is only available as a new mortgage and not a re-mortgage on an existing interest only loan.
The Family Building Society has confirmed plans to launch a deal for those needing to re-mortgage in retirement. It is expected to be available in September this year.
Early stage discussions
John Eastgate, of rival lender One Savings Bank, said they are in ‘early stage discussions ‘ about product design and funding options.
He said: “The recent change to regulation is genuinely to be welcomed and opens up opportunities both to help those needing to re-mortgage existing interest-only mortgages and older borrowers looking to free up some of their wealth to pass on to the next generation.
“I can see interest-only in retirement helping expand the Bank of Mum and Dad and Granny and Grandad, especially where they have a lot of equity in their homes and a desire to help kids and grandchildren onto the property ladder before they die and an inheritance is passed on.”
But there are concerns that such a radical shake-up of the system could lead to a fresh bout of mortgage debt.
Latest figures show 11,000 families could lose their homes because they can’t afford to repay the capital on their existing interest only mortgage.
Eastbourne MP Stephen Lloyd has campaigned on the issue and said: “Tens of thousands of families face losing their homes after being snared by this desperate situation. This is unacceptable.
“If someone can keep up their mortgage whatever their age, they should be allowed to stay in their home securely. It’s what living in a civilised nation is about and is what people deserve.”