The tightening of lending policy by Banks & Building Societies has had the unintended consequence of creating a new group of borrowers now being labelled as an ‘Interest Only Prisoners.’
What is an Interest Only Prisoner?
- Some people borrowed on an interest only basis planning to repay their mortgage using methods that are no longer acceptable to lenders. Their current lender may be charging them far more than they could pay elsewhere but because new lenders won’t accept ‘Interest only’ they are effectively trapped with their current lender paying the higher rate.
- Some people arranged their interest only mortgage with a term which extended into their retirement. At the time these borrowers expected to be able to either extend the term of the mortgage or move the mortgage elsewhere, later on. Because ‘lending into retirement’ is now discouraged by lenders, these borrowers are effectively approaching the end of their mortgage term with little hope of being able to realise their initial intentions. They therefore face the worry of the lender demanding repayment of the mortgage with no easy way of repaying or replacing the mortgage.
There are 2 fundamental changes to lending policy causing these issues:
- Most lenders either no longer offer Interest Only mortgages or, those that do, set such strict criteria that most borrowers don’t qualify for it.
- Lending into retirement is now seen as ‘high risk’ with lenders paying far more attention than ever before to an applicant’s retirement income in relation to the cost of the mortgage.
Depending on the borrower’s circumstances, and future plans, these changes have resulted in many people either facing being stuck with their current lender or significant increased cost because they have had to adopt a different repayment strategy such as switching to a repayment mortgage.
Based on the recent pension proposals, an additional problem has also come to light. In the past lenders were happy to take pension income into account in their calculations. However, the proposed changes will allow people to ‘strip out’ their pension fund thus undermining their long term pension income. Lenders may therefore be reluctant to rely on this income for securing the mortgage long term because the income may only last for a short period of time.
Clearly such a change of attitude and approach on the lenders part can cause significant distress to those who are not in a position to make increased repayments. It is also distressing to be told that the lender wants their money back with the obvious first fear being loss of the house by repossession.
Equity Release Mortgages
A Lifetime, or Equity Release Mortgage as they are commonly known, may help many people out of the situation by releasing enough money to repay the mortgage but this will be subject to the property value and borrowers age. Typical Equity Release schemes roll up interest as time goes by but some do allow the borrower to make monthly repayments.
Either way, this situation, which is continuing to develop, requires expert advice and research into all the options available. BLM’s SOLLA accredited adviser is able to guide clients through a period of high stress in order to determine what options will be available to each particular client and how best to solve the situation. For individual advice, please get in touch with us to discuss your own circumstances.
Not everyone will qualify for an Equity Release Scheme. An Equity Release Scheme will not be suitable for everyone. More details can be found at the Money Advice Service.
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