Mortgage blog: Banks attempt to defuse Britain’s interest-only time bomb
Older borrowers are to be offered new ‘lifetime’ mortgage deals as part of an attempt to help millions of people trapped on interest-only mortgages with no way of repaying their home loan.
Plans to tackle Britain’s interest-only mortgage time bomb are set to see several major banks offer tailored deals to borrowers in their 50s and 60s who face a shortfall when their mortgage term ends.
Lifetime mortgages set to allow older borrowers to stay in their homes
Under the scheme, lenders will allow customers to repay just the interest on their debts until they die if they agree to hand the keys to the property over to the bank, rather than to a family member, when they die.
Interest-only mortgages require a borrower to repay the interest on their loan on a monthly basis with the debt to be repaid in full at the end of the term. However, the Daily Telegraph reports that around 130,000 interest-only mortgages are due to expire every year until 2020, with half facing a shortfall of £71,000 on average.
Ros Altmann, the government's older people tsar, remarks: “If you have an interest-only mortgage it effectively means your bank owns your home, you don't, that's the reality. Lenders are trying to keep people in their homes, rather than repossess them, and these new deals will ensure the bank still owns most of the house when they die.”
Banks want to ‘work with’ older borrowers
Steve Pateman, head of UK banking at Santander, says that lifetime mortgages would be one of a range of options that the bank planned to offer customers.
“A lot of interest-only customers aged 65 to 75 will find they haven't got enough to pay the lump sum and don't want to move,” he said. “In our view, extending their mortgage term for a few years is just kicking the can down the road, so we'd rather work with customers, offering a range of solutions, of which one could be a lifetime mortgage.
“As long as customers go in with their eyes open, we don't expect complaints from family that there is 'no money left' for an inheritance.”
However, experts have warned borrowers that they should only consider this type of loan as a ‘last resort’.
Steve Lowe of financial services firm Just Retirement says: “It would be unacceptable for borrowers to default to a lifetime mortgages as these type of loans require specialist advice, with families sitting down to discuss the consequences over many months before signing on the dotted line.”
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