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Can Equity Release Ease the Pressure of an Interest-Only Shortfall?

Published: 02 March 2017

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Author: Carl Shave - CEO and co-founder
Last updated: 21Jun2024

Interest-only mortgages are a perfectly viable product, but only if there is a plan in place to repay the capital sum when the mortgage matures. Those who are unable to repay their loan in full can be left with little choice but to leave their homes and downsize, which could be a troubling thought for thousands of UK homeowners. But in this impending interest-only storm, is equity release an effective way to ease the pressure of a capital shortfall?

The ‘Logical Solution’

The Financial Conduct Authority (FCA) has highlighted 2017/18 as the first year when a large number of interest-only mortgages sold in the 1990s and 2000s would reach maturity. It has been estimated that around half of those with interest-only mortgages will not be able to repay the loan in full, with half of those having a shortfall of more than 50 percent. Of the 64,000 interest-only mortgages estimated to mature over the next year, 40,000 belong to those over the age of 65. With standard mortgage providers reluctant to lend to those aged 65 and over, many will be left with a shortfall they cannot overcome. In this case, for those not wanting to downsize, equity release could be the logical solution.

A ‘Game-Changer’ for the Industry

In 2013, the FCA requested that all lenders contact their customers to warn them of their upcoming repayment dates. As well as advising its customers of the potential shortfall, Santander is now writing to its interest-only mortgage customers to tell them about equity release as a possible solution to the problem. This has encouraged more banks to recommend equity release to their customers, and this is further fuelling the sector. Given the acceptance of equity release products by the big banks and the number of interest-only mortgage maturities in 2017, this year is expected to be a game-changer for the industry. It could see more than £2billion flow into the equity release market over the course of the year.

What Makes Equity Release a Viable Solution?

While downsizing should always be one of the considerations to ease a shortfall, because there are no interest payments to make (with this being rolled up on to the capital), equity release provides a viable alternative for retirees who prefer to stay in their own home. In this case, equity release can be the lifeline that allows retirees to pay off their existing mortgage without having to make monthly repayments if they cannot afford to do so. Of course, as with any financial product, equity release should only be considered if the numbers are right. Thanks to the many new lenders that are entering the market, equity release rates have reached record lows, with average rates falling by almost 1 percent over the last three years. Our expert mortgage advisers have their fingers on the pulse, so please get in touch with Just Mortgage Brokers today on 0800 114 3978.