The end of October has seen plenty of news stories relating to UK mortgages. However one in particular has garnered a lot of interest, since it relates to the prospect of lifetime mortgages.
The idea is to give older homeowners an alternative if they already have an interest-only mortgage. Typically speaking there should be a financial solution in place to be able to pay off the capital that is still owed on a property once the 25-year period comes to an end. At present if the capital cannot be paid off the prospect of repossession looms large over the heads of homeowners who are often older, perhaps even retired.
The new plans – thought to be offered by a slew of major banks sometime in the New Year – will see the homeowners offered a loan instead. This loan will last for a lifetime and upon the death of the homeowner the property will be sold, with the majority of the proceeds going back to the bank to clear the debt.
The challenges of paying off an interest-only mortgage
An interest-only mortgage brings with it cheaper monthly payments. This is because only the interest on the capital amount borrowed is payable each month. It does however mean the homeowner should have other plans in place that will create the cash necessary to pay off that capital when the mortgage term ends.
At present, approximately 50% of those with these mortgages can pay off the capital at the end of the term. This leaves a huge number of people at risk of losing their homes each year. In fact according to current figures, some 65,000 people annually are at risk of having their homes repossessed as a result of not having the required amount of cash to clear the capital still owed. On average this can add up to tens of thousands of pounds.
The lifetime mortgage could provide an alternative solution
Some of those who are facing such a shortfall at present will no doubt welcome the idea of a lifetime mortgage. However it should be noted that such a plan means the homeowner will not own their home. Instead of leaving the property to family members in their will, the property will instead be passed to the bank in order to clear the debt left behind.
Clearly this is an option some will approve of and some will not. In reality however, someone who faces a large shortfall has little option but to either downsize, move out to find somewhere else to live, or to have their home repossessed. Those with interest-only mortgages are living with a debt that must be cleared in order for them to own their own homes. Until that debt is cleared they are not strictly the owners.
The mortgage for life plan does provide an alternative for those who may otherwise find their homes repossessed. It does however also provide a thorny problem in terms of a reduced inheritance for those left behind.