Royal London has warned that the majority of homeowners cannot afford a retirement interest only mortgage due to affordability.
Research from Royal London shows older homeowners at the end of their mortgage term cannot afford the ongoing repayments of a retirement interest only (RIO) mortgage as they have not saved enough into their pension.
There are hundreds of thousands of interest-only borrowers will come to the end of their loans over the next few years with no savings to repay the original mortgage loan.
Current rules on affordability means the majority of residential first time buyers
and home movers
take out a new repayment mortgage that ensures the original loan is repaid at the end of the term.
Older remortgage buyers
may have hoped that a new interest only mortgage running through retirement would be the answer, however, they would still need to meet lender affordability checks.
Savings not enough for retirement
Official data shows 12 million people do not save enough to afford basic living costs at retirement and very few could service additional mortgage debt.
Retirement interest only mortgages are assessed by the lender taking account of income when one partner becomes a widow or widower and this determines if the mortgage is affordable.
Many pensions stop on the death of a partner so a mortgage that seems affordable when both partners are alive with joint incomes can become unaffordable if one dies.
Royal London has estimated that someone on average earnings of £26,728 wanting two-thirds of this in retirement or £17,819, after their full State pension of £8,546 they would need a fund of £260,000 to make -up the shortfall.
The FCA regulator has found the average outstanding balance of an interest only mortgage borrower with a repayment vehicle is £55,000 for those with no way to repay the loan it is £121,000.
If these homeowners at retirement intend to service this debt for as long as they live they would need additional pension funds of £118,256.
Becky O’Connor personal finance specialist at Royal London said, with many people not saving enough in a pension, many borrowers are likely to have an application for a RIO mortgage rejected, or be offered a much lower amount than their shortfall.
This does not apply to buy-to-let landlords
as they must have a 25% deposit and show the rental income can exceed 145% of a notional mortgage interest rate.
Action to take to repay a mortgage
The FCA found there are 550,000 interest only mortgage borrowers aged 55 and over in December 2018 of which 50% have a shortfall.
For those at or approaching retirement must either continue working for longer, downsize, use a RIO mortgage or take out an equity release mortgage.
The rise in house prices has allowed the older equity release buyer to stay in their home while accessing the wealth in their property with a lifetime mortgage to consolidate debt and repay an interest only mortgage.
A homeowner using equity release buyers
can typically secure fixed interest rates of 3.0% upwards without any evidence of earnings which is important for borrowers with only pension income.
Becky O’Connor said, the introduction of RIOs may give false hope to hundreds of thousands of borrowers with interest-only loans they can’t pay off at the end of the term.
These loans might seem like the perfect solution, but in practice, because of affordability criteria, they will not be the answer for most people, says Becky.
What are your next steps?
Talk to our London City Mortgage advisers if you are an older homeowner releasing equity from your property, we can recommend the lifetime mortgage to access wealth for home improvements or gifting to a family member.
Learn more by using the equity release calculator
, property value tracker
chart and mortgage monthly costs calculator
. Start with a free mortgage quote or call us and we can take your details.
At LCM our mortgage brokers can provide advice if you are a first time buyer, moving home, want to remortgage your existing home to a new cost effective mortgage deal or are a buy-to-let investor.
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