The Financial Conduct Authority removed a regulatory barrier to allow ‘retirement interest-only mortgages’ for older consumers, meaning the loan would only be repaid on a specified life event such as the customer’s death or move into residential care.
After setting out plans to reintroduce the product last year, the FCA has said retirement interest-only mortgages will now be excluded from the definition of a lifetime mortgage.
Retirement interest-only mortgages remove the need of a defined term, so it can run until they die or enter into care.
It will allow customers to pay just the interest on a monthly basis until they die or go into long-term care, at which point the capital will be paid back to the lender when the house is sold.
It differs from equity release schemes, in that the interest on a retirement interest-only is paid off each month and not rolled into the loan, allowing the owner to have a larger share of the profits when the property is sold.
John Heron, director of mortgages at Paragon, comments: “The FCA changes are a very positive development. They allow a broader range of solutions for older customers looking for a longer or indefinite mortgage term.
"They also offer potential for customers looking to release capital for adaptations to their homes or to help younger family members get established.
“What’s key is making sure that monthly payments are affordable and customers understand the future implications when they come to sell their property.”
Mr Boulger adds: “There’s no doubt some people locked out of interest-only will now qualify under retirement only, providing they can prove affordability and that they don’t need to borrow more than the maximum LTV.
"This means some borrowers who are now mortgage prisoners might be in a position to get a mortgage.
“Having said that, although there are only lenders in that market, we will see more lenders coming into that marke. For anybody not in a rush I would say wait a few months until there is more competition, which will mean more competitive rates.”
Mr Green also believes the retirement interest-only option will be effective for a certain group of older borrowers.
He states: “When you get into retirement, it is not just about equity raising. Some people want to raise equity to work on their home and they need different repayment strategies.”
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