Retirement interest-only mortgages: unravelling the FCA’s rule change
4 minute read
The Financial Conduct Authority (FCA) recently announced a change of rules in how retirement interest-only mortgages are categorised – and it is hoped that the change will allow lenders to offer products that will provide a greater variety of choice for older homeowners who want to release equity in their property.
Retirement interest-only mortgages allow homeowners to borrow a lump sum against the value of their property. They then make monthly payments towards the interest accruing on the mortgage. They do not have to make any repayments towards the amount borrowed, which is repaid to the lender on the sale of the property – typically when the homeowner dies or moves into a care home.
Under the previous rules, retirement interest-only mortgages were categorised alongside other products including lifetime mortgages and equity release schemes. These types of schemes operate in a broadly similar way, but rather than the homeowner making monthly interest payments, the interest is “rolled up” and added to the balance owed to the lender when the property is sold.
Because the amount owed can quickly grow, these types of products require consumers to receive compulsory advice from a fully qualified advisor on the details of the products and the dangers of repossession. Because of this, many lenders have simply chosen not to offer these types of products, effectively restricting the range of deals available to consumers.
Under the new rules, retirement interest-only mortgages have been reclassified as standard mortgages, which do not require applicants to receive additional financial advice. The FCA hopes that by allowing an easier sales process and removing the requirement for specialist advisors, this will motivate more lenders to make this type of mortgage product available, thereby expanding the choice of products available to consumers.
Why might this be good news for retired and retiring homeowners?
More choice on the market is always a good thing, and in theory, more variety could help make such products less expensive as lenders compete with each other on interest rates. That aside, retirement interest-only mortgages can have advantages over lifetime mortgages and equity release schemes for homeowners looking for a lump sum in retirement, by virtue of the interest being repaid monthly rather than rolled up – simply put, it stops the interest building up quickly and eating up the equity available in the property.
Retirement interest-only mortgages could be of particular interest to the 1.9 million mortgage holders in the UK who currently have an interest-only mortgage, many of whom don’t have a plan in place to repay the mortgage when it reaches the end of its term. Some of these customers may be able to replace their expiring interest-only mortgage with a retirement interest-only mortgage, which will allow them to remain in their home until they die or move into long-term care.
Are there any drawbacks?
The main consideration for those thinking about a retirement interest-only mortgage is that you need to have a reliable source of income in place to continue making the monthly interest repayments. As with any other type of mortgage, missed payments and arrears could ultimately lead to repossession of the property. In common with other equity release schemes, borrowing an amount against your home will reduce the amount of inheritance that your beneficiaries may receive when you die and the property is sold – although not by as much as with other types of equity release.
Who should I talk to about retirement interest-only mortgages?
While the change in FCA rules means that you no longer have to receive specialist advice when taking out a retirement interest-only mortgage, it’s important to know what your options are to allow you to make an informed choice about whether this is the right kind of product for you.
At Just Mortgage Brokers, our advisers are familiar with the potential needs of those who this type of product may suit and have access to specialist brokers who are fully qualified in giving such advice. To discuss how we can help you, give us a call us today or contact us online.