The Financial Conduct Authority’s (FCA) Mortgage Crackdown On Interest Only
Interest only mortgages have been in the spotlight with the UK property market for quite some time. This escalation in best interest only mortgages is particularly concerning as it commenced when people were borrowing increasingly excessive amounts. At the same time low cost endowments which were the traditional investment product sold as the repayment vehicle for an interest only mortgage were dying out. The timing could not have been worse.
Essentially, this resulted in many new borrowers drafting their main plan for mortgage repayment by relying on house prices to keep rising.
This is where the FCA intervened
Their mortgage market review and subsequent proposal forced lenders to have a much tougher stance on UK interest only. Lenders would now have to provide evidence on how they assess affordability. Borrowers would have access to this calculation by using interest only calculators. It would compare the cost of a repayment mortgage and then stress test the mortgage borrowers to ensure they could maintain the monthly payments.
This could additionally be checked to see if affordability was an issue once they then revert to a standard variable rate and the mortgage interest rate increase was 2%.
This toughened approach has resulted in most mainstream mortgage lenders ceasing to offer an interest only mortgage unless a savings vehicle such as an ISA is established and evidence of monthly premiums paid. Lenders have also removed the ability of the mortgagor using the sale of property as the repayment vehicle or even an inheritance on mainstream interest only mortgages.
Interest-Only Options for Retirees
While some products have disappeared from the market or become harder to obtain, retirees still have some interest only lifetime mortgages to take advantage of. The FCA also delved into issues with these products, but found as long as the house could be used for resale at the death of the homeowner and with certain SHIP Code of Conduct clauses the products were reasonable.
The Code of Conduct Rules clearly state no property can have a negative equity effect in which the sale of the home would not cover the loan. In other words, borrowers can only borrow up to a certain amount of the home value to avoid 100% equity usage. It protects against depreciation of the house should it occur. It also means the beneficiaries would not be responsible for paying the debt.
With the caveat of selling the home to repay the debt for retiree mortgages an ISA or other investment vehicle is unneeded. Providers of these mortgages also do not require proof of disposable income, although some still might.
The repayment of the balance is at the end of life; however, the interest payment is still required each month as a means of keeping the capital sum the same.
Other Options for Homeowners in Retirement
Lifetime mortgages are not conventional mortgages, so they are not held to the same standards as the FCA has for traditional loans. By standards, it is meant that income is not a factor. There are definitely rules to follow for these products. The lender has to offer a sum below 100% equity usage and based on the life expectancy of the borrower. If the borrower is closer to 55 than 80, then less is borrowed to account for accrual of interest rates.
Also companies are able to wait for full repayment and interest payment till the end of the homeowner’s life. The difference is interest is not paid in these other forms of lifetime mortgages. It accrues increasing the sum due at the end, which can remove any potential inheritance available.
FCA worried about inheritance issues asked for a potential choice by homeowners. Lenders are supposed to provide a choice called an inheritance guarantee in which the owner can save out a portion of their home from the equity mortgage that is solely for the beneficiary. Homeowners can request this clause be in the agreement before signing. For homeowners that have no beneficiaries the clause is less important.
Beneficial Changes Brings Security
With changes to the market both in mainstream and retirement mortgages, homeowners can feel more protected. They also have solutions to their financial needs and potential extensions for their retirement income. There is more security in the current market. The FCA and Equity Release Council are there to ensure homeowners have safe options and choices. When necessary there are financial advisers working at independent firms who can also help.
Always make certain you have thought about your financial decision, thoroughly researched, and are making the best decision for your situation and later requirements.
