Escape routes for pensioners caught in a mortgage trap
Many baby boomers aged over 65 with interest-only loans face losing their homes, reports Sarah Davidson
Sunday 14 October 2012
We all recognise the plight of the first-time buyer trying to get their foot on the housing ladder but increasingly, pensioners face just as serious a battle simply to stay put. More than 100,000 homeowners aged over 65 are on interest-only mortgages and face losing their home as they have no way to repay at the end of the term. With rapidly dwindling options experts are warning that Britain faces a mature mortgage crisis.
Five years ago mortgage lenders offered loans to people well past the age of retirement but new rules intended to stop another financial crisis have seen mortgage options for borrowers heading into later life virtually dry up.
"Many of my clients are affluent, educated individuals who have a clean credit history. Their circumstances mean they want to borrow for just five more years but they're finding it can't be done competitively," says Steven Smith, a mortgage consultant at Springtide Capital.
In fact, the vast majority of lenders refuse to give people mortgages past the age of 75 and experts fear the problem is becoming a time bomb for millions. The Consumer Credit Counselling Service has seen a 44 per cent increase in the number of over-60s failing to meet their mortgage payments in the past three years and 7 per cent of the over-55s have more than £150,000 of mortgage debt they're struggling to repay.
"A large number are interest-only borrowers with some mortgaged into retirement because their endowment policies have not performed and now they're £20,000 to £30,000 short. Others simply took interest-only to keep the repayments down on the house of their dreams," says Simon Little, a retirement specialist at Autumn Life Retirement Solutions.
Indeed, after months of lenders running scared of interest-only loans, Nationwide was the first to pull out a few weeks ago.
But there may yet be a glimmer of hope for older borrowers. "While many have never had it so good, the baby-boomer generation has come under pressure from both their parents and children who have struggled recently. Many will have used their own finances to help out," says Peter Turley, a director at specialist retirement lender Newlife.
That's the reason his firm has designed a mortgage for those over the age of 65 who need longer to repay or who need a mortgage to buy a more suitable home. Borrowers can take a loan up to £350,000 providing they have 50 per cent equity in their home at a tracker rate of 5.74 per cent over a maximum of 25 years either on a capital repayment or interest-only basis.
Fees are certainly steep – £299 for the application fee, a standard valuation fee and a £1,995 lender fee, which can be added to the loan. But early repayment charges apply over 3 per cent of the original advance in the first year only.
"This deal is bound to hold plenty of appeal as it brings another option to an under-served sector of the market," says mortgage adviser David Hollingworth of London & Country.
But while advisers are glad there is another choice for borrowers some are less sure about the costs involved. "Is this really competitive against two-year fixed, or tracker rates at below 3 per cent and lifetime tracker rates well below 4 per cent?" questions Springtide's Mr Smith.
And Dean Mirfin, the group director of adviser group Key Retirement Solutions, worries that taking the deal out on an interest-only basis doesn't solve the problem. "Repaying the mortgage doesn't go away forever, just for a while," he warns.
"People in this situation do have limited options if they want a normal mortgage," warns mortgage broker Dean Mason of Masons Financial Planning. "But speaking to your existing lender is usually the best bet."
He suggests Halifax, part of Lloyds Banking Group, and Barclays are the most flexible high-street lenders on age, but HSBC does not impose any upper age limit, Nationwide will lend beyond retirement if the term ends by age 75 and Royal Bank of Scotland says it will look at each case "on an individual basis".
Leeds Building Society offers a specific range of retirement deals up to a maximum age of 80 including a two-year fixed rate at 4.49 per cent for borrowers with 30 per cent equity and a £199 fee. National Counties Building Society has nine-year fixed rate of 4.19 per cent up to 25 per cent loan to value with a £995 fee for borrowers aged 75 on a minimum 10-year term.
But for borrowers looking to take a mortgage beyond normal retirement age there will be more focus on evidence of their income, warns Mr Hollingworth. And that complicates things. Annuity rates have been falling for five years and now, roughly speaking, a husband aged 65 and wife aged 60 with £100,000 to buy a joint life annuity can expect an annual income of just £5,067. Mr Mirfin also warns joint income may not be sufficient for the whole term.
"It's not nice to think about, but anyone taking a mortgage over 25 years who's already over-65 has to face the fact that no one lives forever," he says. "And if one spouse dies the annuity income can be drastically reduced."
Ageing borrowers running out of options may need to consider downsizing if they have built up a good level of equity, advises Mr Hollingworth. "Of course that can be easier said than done, especially if staying in the same area, as smaller properties may still require some finance," he adds.
In this situation equity release is becoming more attractive with interest rates as low as 5.65 per cent fixed for the loan's lifetime. "With no need to make a penny repayment and to take cash tax-free from your property this has to be an option worth considering for many," says Autumn Life's Mr Little.
Case study: Kenneth and Alexis Richards
Five years ago, the Richards moved from their mortgage-free, four-bedroom home to a bungalow in Bridgend, Wales.
Mr Richards, now 73, was becoming less mobile, but the couple needed a small mortgage of £31,000 to buy, so in 2007 Northern Rock signed off an interest-only deal with monthly payments of £160.
Earlier this year, Mrs Richards, 65, tried to remortgage the debt. On calling Northern Rock she discovered it would only extend the loan five years because of her husband's age.
"We were trapped. That's why we took a lifetime mortgage and rolled the interest up.
"It's a bit unfair – the Government agrees people are living into their eighties or nineties but banks aren't making that provision — they're saying no, we're not going to chance it."
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