How equity release could help pay off interest-only mortgage
Experts are warning that thousands of retired homeowners may face a shortfall on their mortgages this year as interest-only terms come to an end.
The Financial Conduct Authority has flagged 2017-2018 as the first year in which a wave of interest-only mortgages sold in the 1990s and 2000s will reach maturity.
It estimates almost half of those with interest-only mortgages will not be able to repay their loan, leading to an expected increase in the numbers looking to equity release – through which homeowners can access property wealth – to help plug the gap.
Equity release is available to those aged between 55 and 95, who own a property worth at least £60,000.
The amount of tax-free money released varies depending on factors such as age and the value of the property but, last year, mortgage repayment accounted for 22 per cent of the funds released, according to over 55s finance specialists Key Retirement, with this figure set to rise.
They recently revealed the average customer accessed nearly £78,000 from their homes last year, with two-thirds using the cash to make home and garden improvements, and around a third spending some of the money on clearing loans or credit card debts, narrowly ahead of the 29 per cent who used the money to fund holidays.
Industry experts estimate almost half of homeowners with interest-only mortgages will not be able to repay their loan in full when the term ends. And, says Dean Mirfin, of Key Retirement, it is a problem that is not going to go away.
He said: “With 2017 being the start of the first major wave of interest-only mortgage maturities, we expect demand from those with a shortfall to turn to equity release.
“Downsizing is an option but many homeowners want to remain in their properties, which may be close to friends and family.
“For them, choosing the money from their home to repay the outstanding mortgage may be the right option. With the right to stay in their home for as long as they want, the outstanding loan can be cleared using the cash unlocked from their property.
“Last year, 22 per cent of Key Retirement customers released money for just that purpose.
“With borrowing options limited for those in retirement, property for some could be the answer to many of their financial needs in retirement when faced with pension and savings shortfalls.”