Lenders launch first interest-only mortgages for pensioners

Older borrowers who faced losing their home through inability to renew their mortgage have been thrown a lifeline by a new breed of interestonly loans.

In March the City regulator confirmed changes that would allow mortgage companies to offer interest-only loans with no fixed end point.

The technical change means that borrowers approaching the end of their loan who have no means to repay the debt won’t be forced to sell their home, provided that they pass affordability checks.

Interest-only loans, far cheaper to service than repayment mortgages, became all but extinct after the financial crisis.

As well as being cheaper than repayment loans, “retirement mortgages” could also help borrowers put off by equity release plans, where interest typically rolls up. In some cases the equity release loan becomes so large that there is nothing left to pass on following the death of the borrower.

Bath Building Society recently launched a retirement mortgage. Homeowners can borrow up to 25pc of their property’s value, up to a maximum of £200,000, using Bath’s interest-only loan currently at a variable rate of 4.29pc where a power of attorney is in place, or 4.99pc otherwise. This is a 1 percentage point discount on Bath’s “standard variable rate”.

You must be 65 or older, with enough income to make the interest payments. There is no end date on the loan; it is paid off when you die or move into a care home or a relative’s property.

As with many regional building societies, the mortgage is available only to those in the mutual’s catchment area of Bath and nearby counties.

Vernon Building Society also offers two retirement mortgages of up to 50pc of the property’s value with a cap of £250,000. The variable interest rate is currently 3.7pc with power of attorney or 4.45pc without.

It is open to retired borrowers with a pension income. Vernon offers the loans across Britain, apart from Scotland.

Retirement interest-only rates are higher than conventional fixed mortgage rates. Vernon said this was to reflect the “increased resource” required to provide advice and manage the mortgages through their lifetime.

David Hollingworth of L&C, the mortgage broker, said the new type of mortgage would suit those who wanted to “release some equity but don’t want to roll up interest over time, which could erode equity and any inheritance”.

It would “help bolster the options for older borrowers and break through the ceiling of maximum ages that can exclude borrowers in later life”, he added.

‘They help bolster the options for older borrowers’