There were always going to be some clear implications for existing borrowers from the introduction of the Mortgage Market Review (MMR) and this has proven to be the case. The facts of the matter are relatively simple – securing a mortgage, whether the client is a new or existing borrower, is now much tougher than in the previous regulatory environment. Those clients, particularly those who we might deem in ‘later life’, will no doubt be faced with a rather different mortgage market post-April 26th than they encountered before then.
Some sub-sectors of the market have effectively been regulated out of existence – self-certification and fast-track being a case in point – however others have also been hit, not least the remortgage market; a sector which has appeared to be in the doldrums for some time. The MMR has certainly not changed this. As Lynda Blackwell of the FCA pointed out in her address to the FSE London exhibition recently, the remortgage market remains “very subdued” and remortgaging “in order to fund consumption and fund debt… has proved to be unsustainable”.
This clearly has a considerable impact for many borrowers who might previously have been able to refinance but now find themselves confronting lenders’ decisions not to offer them a remortgage deal. These ‘mortgage prisoners’ are at best having to make do with the lender’s SVR, or at worst, are interest-only borrowers at the end of their term who are having their loans called in. This is the ‘interest-only time bomb’ that is often talked about and, for those in their 50s and older it is a very serious situation to have to deal with.
Of course, ideally these customers would have had a repayment vehicle running alongside their interest-only mortgage in order to pay off the capital at the end of the term. However, given that we are looking at interest-only deals taken out (in many cases) a significant number of years ago, too many borrowers never put a vehicle in place. Unfortunately, in this tighter lending environment, with lenders’ stricter criteria on affordability/income affecting their ability to lend to people into retirement, the repayment vehicle chickens have come home to roost.
It is for this very reason why we have been keen to educate advisers and their clients on the potential solutions to this problem that exist. One of those is of course the option of equity release and it would appear the message is sinking through and more borrowers in this predicament are aware of such an approach. Recent research from an equity release provider on the uses of equity release products by its customers suggest that over one in three (38%) have been applying for a lifetime mortgage in order to clear debt, with the majority of these individuals having to pay off maturing interest-only loans.
Being able to clear the mortgage in this way is obviously appealing to those who cannot meet the lender’s requests for payment and, while not necessarily an ideal situation for those borrowers, it does at least allow them to fulfil their responsibilities whilst staying in their own home. It is why many borrowers are currently seeking out the services of equity release/later life advisers and the number of those affected is unlikely to fall back anytime soon. A survey in July this year, from Ascent Performance Group, revealed that as many as a third of interest-only borrowers had no idea how they would pay off their loan, with 15% suggesting they did not have the funds to make the repayment.
With thousands upon thousands of interest-only mortgages coming to the end of their terms over the course of the next decade, equity release advisers should certainly be positioning themselves in this market space in order to provide advice and support to these potential clients. This is a predicament that too few older homeowners have the answer to and therefore advisers should be making themselves highly visible in order to make sure they’re the first port of call for such customers.
Chris Prior is manager for sales and distribution at Bridgewater Equity Release