Equity ReleaseJan 19 2017

Interest-only 'prison' to double demand for equity release

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Interest-only 'prison' to double demand for equity release

While not all lenders and brokers wanted to put a figure on expected growth, all agreed that the hundreds of thousands of interest-only maturities due over the next few years would be a “game-changer” for the industry.

The Financial Conduct Authority has highlighted 2017 to 2018 as the first year in which a large number of the interest-only mortgages sold in the 1990s and 2000s would reach maturity.

The FCA has estimated almost half of those with interest-only mortgages would not be able to repay their loan in full.

Of those, 50 per cent would have a shortfall of more than £50,000.

Anticipating potential defaults, in 2013 the FCA requested lenders to contact their customers to warn them of their upcoming repayment date.

Stuart Wilson, channel marketing director of equity release lender More 2 Life, said of the 64,000 interest-only mortgage loans due to mature this year, 40,000 belonged to people over the age of 65.

That, he estimated, accounted for £3bn of debt.

Given standard mortgage providers’ reluctance to lend to those aged 65 plus, he said for those who cannot pay back the loan in full, and are unable or unwilling to downsize, equity release would be the logical solution.

He said the amount flowing into equity release “could be bigger than the entire equity release market now”, which currently stands at just in excess of £2bn a year.

Nigel Waterson, chairman of the Equity Release Council, said he did not want to put a figure on growth of the market, but agreed that interest-only maturities would “turbo-charge” the industry.

“I expect quite a big surge in demand because of the interest-only prisoners,” he told FTAdviser.

While saying people should first consider downsizing – always a better deal than equity release, because it does not involve paying interest – he pointed out that in practice retirees preferred to remain in their home, often for emotional reasons.

“If the numbers are right, it may be an ideal solution,” he said.

According to Key Retirement, the average mortgage debt for those releasing equity is £81,000, costing borrowers £412 a month in interest. 

Andrea Rozario, chief corporate officer of equity release advice firm Bower Retirement, said equity release could be a "lifeline" for interest-only mortgage holders who do not have a repayment vehicle in place.

"They may have thought that they would downsize, then they’ve come to the point that they feel they don’t want to downsize or can’t downsize," she said.

"Equity release for them can be a lifeline, because it will enable them to stay in their homes, pay off their existing mortgage and not make monthly repayments if they can’t afford to.”

She argued that a lot of people – including IFAs – had misconceptions about equity release, largely driven by media “scaremongering”.

She insisted that the industry had cleaned up its act since the mis-selling scandals of the 1990s.

Most importantly, she said Equity Release Council members only offered products with “no-negative equity guarantee”, meaning there was no risk of pensioners being forced out of their home in the event that the compounded interest, plus the value of the loan, exceeded the value of the property.

Currently, the Equity Release Council has only 11 provider members, the largest being Legal & General.

A handful of lenders are not members of the Equity Release Council, and are therefore permitted to charge interest on negative equity.

FTAdviser asked the FCA to comment on the consumer protection implications of the upcoming flood of interest-only maturities. They declined to comment.

james.fernyhough@ft.com