With 1.67 million people approaching retirement with an interest-only mortgage, a new product aims to bridge the gap between equity release and a traditional mortgage. But is it a good deal?
Legal & General has launched a new mortgage product designed to help pensioners who want to borrow against their home.
The Optional Payment Lifetime Mortgage (OPLM) allows you to take out a mortgage on your home with the interest fixed for life and the capital not due for repayment until you either move into long-term care or the property is sold after your death.
However, you also have a choice over how the interest is repaid on the mortgage.
You can either leave it to roll-up on top of the loan and be paid when the capital is repaid. Or, you can choose to cover the interest in monthly payments.
“This is an example of how the market is recognising that some borrowers don’t want to roll interest up.
That is why some will still want to use a traditional mortgage structure, rather than equity release,” says David Hollingworth associate director of L&C Mortgages.
“This hybrid approach seeks to offer a more flexible approach so borrowers can elect to make monthly payments, but still gives them the ability to stop and roll up whenever they decide that is appropriate.”
Can equity release work for you?
The launch comes after the Financial Conduct Authority announced that it wanted more choices in the market for customers wanting to borrow in retirement.
“The FCA has recognised that there needs to be solutions in place to support interest-only mortgage customers as they enter retirement and we welcome this innovation from Legal & General,” says Paul Norcott, head of mortgages and insurance at The Co-operative Bank.
“The flexibility offered by OPLM for customers to continue making interest payments and to manage the interest roll-up are real benefits which will appeal to many customers considering the transition to lifetime mortgages.”
Affordability problems
The problem facing many pensioners is they may not have cleared their mortgage or need to borrow against their home but they fail the stringent affordability requirements lenders have introduced after the Mortgage Market Review.
The OPLM helps with this as applicants don’t have to pass any affordability assessments, or have a capital repayment strategy in place, as the loan will be repaid from the sale of the property.
“At Legal & General, we often hear the same question from customers with interest-only mortgages – ‘can’t I just continue to pay my interest?’
"These customers feel let down by the mortgage market – they have always paid their interest, but no longer qualify for a new mortgage because of affordability assessments or, more simply, their age,” says Steve Ellis, CEO at Legal & General Home Finance.
“OPLM is a direct response to this growing customer need for a different kind of retirement mortgage, one that provides flexibility for borrowers and which also has the potential to address the interest-only shortfall that remains a fundamental issue for the mortgage market.”
What rates can you get?
The OPLM has a differing maximum loan-to-value depending on your age when you take out the mortgage and they type of product you choose. It ranges from 11% LTV to 54% LTV.
You can borrow between £10,000 and £750,000 and your property must be worth at least £100,000.
The interest rate varies from 3.88% up to 5.56% AER. The mortgage is available to customers aged 55 and over.
“Whilst OPLM is different, it still comes with all the lifetime mortgage guarantees – the biggest of which is the right of tenure for life,” says Ellis.
“If consumers find they can’t or don’t want to continue to pay the monthly interest payments for any reason, they can simply convert to interest roll-up – with no fuss and no assessments.”
Case study: how it works
We asked Legal & General to provide a practical example of how this might work. Here's what they had to say:
A couple in their 70s has been notified by their bank that their interest-only mortgage will be maturing shortly and the £65,000 they originally borrowed will need to be repaid. The customers do not have any savings or investments to repay this capital, now or in the future.
The customers are keen to stay in their home throughout retirement, having considered downsizing to a smaller property, but decided it was not the solution for them.
Their bank is struggling to help them as the customers can’t show how they will ever be able to repay the capital and their current income is not sufficient to pass a standard mortgage affordability assessment, especially when their bank takes into account what interest rates may be in the coming years.
There is a risk the customers will no longer be able to afford the monthly interest and they are likely to fall into payment difficulties at some point.
Their bank is keen to make sure the customers get a solution that will work for the couple and not put the customers at risk of losing their home, now or in the future.
The customers are retired, and their retirement income is enough to support interest payments on a lifetime mortgage.
The customers speak to an adviser who recommends an Optional Payment Lifetime Mortgage from Legal & General.
The customers do not need a repayment strategy as the £65,000 loan plus any interest owed will be repaid from the sale of the home after death or a move into long-term care.
The customers are able to make monthly interest payments for the full duration of the lifetime mortgage, and the fixed interest rate means the monthly payments will never increase.
If the customers ever get into payment difficulties they have the option to stop making monthly interest payments and instead the interest is added to the loan each month, which will also be repaid from the sale of the property.
What do you think? Would you consider the OPLM product or do you think there are better alternatives? Share your thoughts in the comments section below.