Posted on 21st November 2014

Lifetime Mortgages to Help Tackle "interest only" Time Bomb

Martin Williamson, Head of Residential Property
After years of turbulence caused by soaring then plummeting property prices the mortgage market is once again the subject of a seismic shift.

Santander has become the first bank to announce it will offer lifetime mortgages a form of equity release for people currently with interest-only arrangements. The family home is sold when they die and all or part of the proceeds handed to the bank to pay back the outstanding loan.

However, experts are warning that such schemes should only be used as a last resort and borrowers should discuss it with their families before selling off the property.

Millions took out interest-only mortgages in the 1980s and 1990s. Monthly repayments are lower than with a traditional mortgage because only the interest, rather than any capital, is being paid off. However, that leaves the full loan to be repaid at the end of a typical 25-year term. Around half of the 85,000 interest-only loans which expire every year cannot be paid off in full, with the average shortfall in excess of £71,000. Around one in ten of those with such loans have failed to plan ahead and save money into a repayment plan. Others bought an endowment policy, a stockmarket-linked savings plan designed to pay off the loan in full but many have discovered that such plans fall short of expectation.

Santander said a lifetime mortgage is one option we are considering for 2015 in a bid to save families from eviction or being forced to sell their home and downsize to a cheaper property. Where Santander leads, other banks are expected to follow in a bid to help tackle a mortgage timebomb which could see families forced to downsize at the end of their fixed term or face repossession.

Lifetime mortgages will work like equity release, where homeowners use their property like a cash machine by borrowing money against the equity they have built up. The difference is that with traditional equity release, borrowers never repay the interest. With the bank loans proposed by Santander they will pay monthly interest until they die. The remaining debt will be deducted from the sale value of the property, leaving their children or grandchildren with a reduced inheritance.

Lifetime loans of this kind are one solution to the ticking timebomb of interest-only mortgages. But they could also, due to their peculiarly emotive nature, trigger family tensions.


Please note: This article is intended as guidance only and does not constitute advice, financial or otherwise. No responsibility for loss occasioned/costs arising as a result of any act/failure to act on the basis of this article can be accepted by Latimer Hinks. In addition, no responsibility for loss occasioned/costs arising as a result of any act/failure to act on the basis of this article can be accepted by the firm.