Back in 2013, the FCA identified three residential interest-only mortgage maturity peaks. The first peak was back in 2018 and there are two more predicted for 2027-2028 and 2032. What’s more, interest-only mortgages are very much still available in the residential-mortgage market. In fact, the number of residential interest-only mortgage products available almost doubled between 2013 and 2019.
This raises the question of whether or not the “mortgage timebomb” can be diffused over the next decade or so or if it could tick on for longer. Of course with recent events and the raised interest in this product, the question is now very important.
A brief explanation of interest-only mortgages
With an interest-only mortgage, the borrower makes interest repayments over the course of the term and then repays the capital at the end of the term. On the one hand, this makes monthly repayments more affordable than they would be for a repayment mortgage for the same amount. On the other hand, it means that interest is always charged on the amount originally borrowed, rather than over an amount which is continually decreasing. It also means that the only equity borrowers build up in their home is via house-price inflation.
The challenge of paying back the principal
Mortgages, by definition, are secured loans. Specifically, they are loans secured against your home, which means that your home is always at risk if you are unable to make repayments as you should.
With repayment mortgages, however, you are, again by definition, repaying some of the loan principal each month. With interest-only mortgages, however, you have to find an alternative method of paying back the capital and the harsh reality is that even selling the property may not be enough to do so.
The issue of equity
As previously mentioned with an interest-only mortgage, the only equity you accumulated is through house-price inflation. This means that you would only be able to repay the loan capital purely through the sale of your home if you achieved a net profit at least equal to the amount you originally borrowed.
While this is certainly not out of the question at all, it depends both on the state of the housing market at the time and on the tax regime in force. For example, if the government does implement the suggestion of levying stamp duty on sellers rather than buyers, you would need to make enough profit to cover that.
Similar comments apply to using equity release. Even though equity release products do not typically require the borrower to make any repayments during their lifetime (unless they move into permanent care), there is still an expectation that the loan will be repaid, with interest, after their death (or move into permanent care), hence the loan-to-value ratio has to make that feasible.
Alternative repayment vehicles
Of course, selling the property is not necessarily the only way to repay an interest-only mortgage. You could use savings, investments or the proceeds from a pension pot, in fact, in theory you could use anything you wanted as long as it covered the cost. The challenge is that in a low-interest-rate environment, returns on cash deposits are uninspiring. It is, of course, possible for mortgage-holders to put their savings into higher-interest bonds, but the challenge would be to find bonds with high interest but low risks.
Similarly, investment returns are not guaranteed, which means that if the size of pension pot is dependent on investment returns, it is not guaranteed either.
The future of residential interest-only mortgages
In theory, the emphasis on affordability criteria, including having a realistic plan for paying back the loan principal, should protect both borrowers and lenders going forward. In practice, only time will tell if this is the case or if interest-only mortgages really need to be relegated to financial history.
Your property may be repossessed if you do not keep up repayments on your mortgage.
Equity release refers to home reversion plans and lifetime mortgages. To understand the features and risks ask for a personalised illustration.
For equity release, savings, investment and pension products we act as introducer only
The Wealth and Assets Survey of Great Britain is conducted by the Office for National Statistics (ONS) every two years. The latest survey covers the period April 2016 to March 2018. Here is a quick review of some of its key findings along with a guide to its limitations and its real-world implications.
Overall property debt in the UK is on the rise
According to the Wealth and Assets Survey, total property debt in the UK is now £1.16trn. This figure is a 3% rise as compared to the last survey. The number of households with property debt also increased from 9.1M to 9.2M (approximately 1%) and the median household property debt increased by five per cent to £96,000.
NB: In the context of the Wealth and Assets Survey, the term “property debt” covers both mortgages and equity release secured on properties. This is technically accurate since the “lifetime mortgage” format of equity release is a debt secured against a property. It can, however, be different from most forms of debt in that there may be no repayments required during the borrower’s lifetime.
Property debt is concentrated in the middle wealth bands
The Wealth and Assets Survey placed each of its respondents into one of ten wealth bands. The top band comprised the wealthiest 10% of households while the bottom band was the poorest 10%. The survey found that in deciles four to seven, 45% to 54% of households carried property debt, whereas only two per cent of households in the lowest decile had property debt. The lower deciles were more likely to have financial debt (non-property-related debt).
Total financial debt rose by 11% or £12bn to £119B. This was mostly due to hire purchase and student loans. It should be noted, however, that student loan repayments are adjusted depending on income which makes them somewhat different to other forms of debt. In principle, it also means that repayments should always be manageable even if an individual’s financial circumstances change.
Four per cent of households were identified as having problem debt, although, perhaps surprisingly, this figure does not include mortgages in arrears.
The limitations of the Wealth and Assets Survey
The Wealth and Assets Survey does not split out equity release from mortgages, nor does it split out different kinds of mortgages e.g. investment versus residential or repayment versus interest-only. Likewise, the survey only expresses the amount of debt held by any given household. It does not express this data in comparison to the value of the property.
Last but by no means least, this Wealth and Assets Survey is a survey of UK households. It, therefore, does not include property debt held by companies as this is, by definition, not owned by a private individual even if they are the sole owner of the company in question. This means that it does not capture data relating to buy-to-let investors who work through a limited company.
Full details on the Wealth and Assets Survey and its methodology are available on the ONS website.
The practicalities of mortgage debt
While the Wealth and Assets Survey provides an interesting snapshot of property debt in the UK, it does not give any great degree of insight as to what it means in practical terms for each household. For example, although it collects data on property debt for each wealth band, it does not collect data on the percentage of a household’s income which is used to service the debt (which, in some cases may be none, since the survey counts equity release as property debt), or how much equity they have in the property.
Your property may be repossessed if you do not keep up repayments on your mortgage
For equity release products we act as introducers only. Equity release refers to home reversion plans and lifetime mortgages. To understand the features and risks ask for a personalised illustration.
The FCA does not regulate some forms of buy to let mortgages
The (hopefully) short-term impact of the Coronavirus, although undeniably brutal, may turn out to be nothing compared to the long-term economic damage it could cause. Quite simply, people may find that their lives have been saved but their livelihoods have been lost. The government is clearly aware of this and is working hard to keep the UK’s economy moving insofar as it can – and it is placing the financial services industry to come on board with its plans.
Keeping the money flowing
The UK government has pledged to pay 80% of the salaries of all employees furloughed due to the Coronavirus. Separately to this, it has pledged to provide government-backed loans to businesses. When the loan scheme was initially announced it was overwhelmed with applications, but relatively few loans were issued. This fact was blamed on the restrictive rules and the government is believed to be looking at revising the scheme. It’s therefore advisable to keep an eye on the news for updates. The new “Bounce Back” loan has just been released aimed and small businesses, offering loans of a quarter of turnover up to £50,000 over 5 years with 0% interest on the first twelve months and no repayments for twelve months.
It has further pledged to help the self-employed or at least some of them. As has already been pointed out, there are significant cracks in this help. In particular, it does nothing for those who became self-employed during the 2019/2020 financial year nor for those people who are part employed and part self-employed but who earn less than 80% of their income from self-employment.
Theoretically, these people can fall back on the Universal Credit system. Unfortunately, this has been plagued by problems and if reports are to be believed is struggling to cope with the sudden upsurge in applications. It’s also unclear how the minimum income floor will be assessed for people in non-standard situations, like the newly self-employed or the part-employed/part-self-employed.
It’s also worth noting that the impact of the loss of income experienced by these individuals has the potential to spread far beyond the individuals themselves, even if they aren’t breadwinners for a family. As a minimum, it has the potential to impact the income of landlords and companies which provide essential, basic services such as utilities. Under normal circumstances, non-payers might be evicted and/or have their utilities cut off but right now that would be politically-sensitive, to put it mildly.
Finding other ways to help
The government seems to be aware of this and looks to be trying to address the problem from both ends. In other words, if people are falling through the cracks of the income-support measures, then the government can still help them by reducing their expenses. It has to act with a little caution here, to avoid causing problems along essential supply chains. It can, however, certainly ask, or potentially force, certain industries to adapt their behaviour to contribute to the common good and the financial services industry is clearly in its sights.
At the end of March, for example, the Bank of England’s Prudential Regulation Authority contacted banks to make it clear that it expected them to cancel dividend payouts and bonuses to staff. It took a softer line with insurers, just advising them to “think carefully” before making payouts. Another regulator, the FCA has also been communicating with the banks to propose emergency measures to help struggling borrowers.
It has proposed that customers with arranged overdrafts should be allowed to use them interest-free for up to three months and that customers with loans and/or credit/store card debt should be granted a repayment freeze also for up to three months. As with many of these emergency measures, however, they answer some questions but raise others.
For example, if borrowers are in a situation where they are paying more in interest (fees and charges) than they are in capital repayments, taking a payment holiday could hurt them over the long term unless their lender also agreed, or was forced, to freeze interest on the debt. Some people might see this as a very reasonable action on their part given the help the industry received in 2008.
Your property may be repossessed if you do not keep up repayments on your mortgage.
Many customers have contacted us to see how they can financially help their children, grandchildren and others in their family through these difficult financial times. As the stock markets have dropped so significantly, accessing any investments held to release funds to help can mean crystallising loses. Additionally, savings we all hold are precious to help many of us cushion the financial impact of the crisis, and we want to keep hold of them.
So how can you help? – I have been sharing ideas with some of my clients on how accessing the value within their properties could be an option to help loved ones. We are in difficult and unprecedented times so I wanted to share these thoughts with as many customers and indeed their extended families, friends and networks as I can. We all need to pull together with thoughts and ideas, on how we can help those close to us through these uncertain times.
Later Life Lending – for those over 55 years of age, releasing money from their property could be an option. There are different options available from a “Retirement Interest Only mortgage”, where you make monthly interest payments like a traditional mortgage but won’t owe more than the initial amount borrowed. A “lifetime mortgage”, sometimes referred to as equity release is where you’re able to take a tax-free lump sum, from the value of your property, that is secured as a loan against your home, typically without monthly repayments. Through, either way, you won’t need to pay back the money until you die or move into long-term care.
A mortgage or re-mortgaging – releasing new or additional capital from your property. A simple straightforward way to use your property value to release a percentage into cash. The Bank of England has cut the base rate to 0.1% in an emergency response to the “economic shock” of the coronavirus outbreak. This makes the interest rate the lowest ever in the Banks 325-year history, so borrowing money against your property value can be a cost-effective option now.
Our homes are precious to us, and an in-depth financial review needs to be undertaken to understand your own personal circumstances, the options, the risks and the benefits.
Please contact us today for “Free Financial Recovery Review”. We can talk you through these and other ways we can help you navigate the options and choices in the post-COVID 19 world we are all adapting too.
Our financial situation can be a bit like a spider’s web. Decisions taken in one area of our financial lives can have implications for other areas of our financial life. In some cases this is obvious (if you spend money, you can’t also save it), in other cases, however, it can be much less obvious. For example, any decisions around equity release could have subsequent implication for anything from estate planning to access to means-tested benefits. With some people considering this as a way to help their families through coronavirus, here is some useful information.
The basics of equity-release
In principle, equity-release simply means tapping into the value of your home. In practice, it can mean different things to different people. In fact, it can mean different things to the same person at different stages of their life.
For younger people, equity release may mean increasing the loan-to-value ratio on their home. Essentially, they are swapping some of the equity they already own for cash in hand, but do intend to make monthly repayments of the loan principal until it is ultimately cleared.
For older people, equity release may mean swapping some or all of the equity in their home for a lump sum or income, without committing to making any repayments during their lifetime. The repayments are made out of their estate after their death, or when they move into permanent care and the house is sold.
Both forms of equity release can have significant implications and so it is strongly recommended to get professional advice before entering into either. Here are some ways they could impact your finances.
This is perhaps the most obvious way in which equity release could impact your finances and/or the finances of your estate. On the one hand, reducing the amount of equity you have in your home could lower the value of your estate and hence the amount of inheritance tax which is ultimately payable on it. On the other hand, if your heirs wish to keep the property, then it may result in them having to pay more to do so.
Tax laws can and do change and so it’s always advisable to check the rules in place at the time of taking out a financial product or service and to familiarise yourself with any changes which are likely to be in the pipeline. As a rule of thumb, however, if you have any income or assets there’s a good chance that HMRC is going to want to claim a share of them somewhere along the line. For example, even if a lump sum is tax-free, if you put it in a bank, then you may end up paying tax on the interest.
If you are planning on releasing equity from your home via a standard, repayment mortgage in order to fund the purchase of investments, then you have to be aware that the performance of an investment is not guaranteed whereas your mortgage repayments are an unbreakable commitment assuming you want to keep your home.
If, however, you are planning on releasing equity from your home via a lifetime mortgage, in other words, one in which repayments are only made after your death, then the situation is a little different. You are not at risk of losing your home, but you may be at risk of making a sub-optimal financial decision, which could leave you or your heirs worse off. This is definitely a situation in which professional advice is to be recommended in the strongest possible terms.
Pensions and benefits
Pensions are not currently means-tested, but should they become so then any funds received through equity release could impact your ability to claim them. As it currently stands, they may impact your ability to claim means-tested benefits. If you are considering the possibility of releasing equity from your home to build up your pension pot then, again, getting professional financial advice is strongly recommended.
For Equity Release we act as introducer only
Equity release refers to home reversion plans and lifetime mortgages. To understand the features and risks ask for a personalised illustration
Your home may be repossessed if you do not keep up repayments on your mortgage
For inheritance tax planning (IHT), estate planning, tax planning, investments and pensions we act as introducer only
The FCA does not regulate some forms of tax planning, inheritance tax planning and estate planning
It looks like 2020 is shaping up to be an interesting year in all kinds of ways. Let’s take a look at what will or could happen and how that could impact the housing market.
Brexit has happened
This is now a given and regardless of your views on the matter, hopefully, everyone can appreciate the fact that there is now at least some degree of clarity on the way ahead. There should be even more clarity by the end of the year when trade deal negotiations should be concluded. The fact that people now at least know the general direction of travel with Brexit may help at least some people resolve housing-related dilemmas.
A trade deal may or may not happen
In principle, any and all trade negotiations should be concluded by 31st December 2020. Given that these negotiations could be highly complex, it’s far from out of the question that there will be an extension to this deadline as there was to the initial Brexit deadline. How long this will be is, of course, anyone’s guess, but the fact that the UK is due to have a general election in 2025 may help to focus negotiators’ minds.
The sooner a trade deal is negotiated (or the sooner it is confirmed that there will not be one), the sooner people will be able to have a really clear view of how the UK and the EU are going to interact with each other over the immediate future and what it means for them. This has clear implications for commerce and hence for employment and hence for the housing market.
A decision will be taken on HS2
The HS2 project is now under review and a decision could have major implications for the housing market in certain parts of the UK. If HS2 goes ahead and delivers the promised benefits, then, regardless of what happens with Brexit, it could massively stimulate the economy in the north of England.
Alternatively, if HS2 either doesn’t go ahead then the north would not see any benefits from it, but if some of the money budgeted for HS2 found its way to other infrastructure projects then it might benefit from those. This might also stimulate the housing market, just in a different way what HS2 should have delivered.
The final option is that HS2 goes ahead but does not deliver as promised, in which case the UK would essentially be stuck with paying for a very expensive white elephant. This would, of course, be the worst-case scenario, but if it did happen, it would not only have potential implications for the housing market, but also potential implications for the next UK election.
It’s unlikely that there will be an election before 2025
In principle, the fact that the government has a clear parliamentary majority means that it could overturn the Fixed-term Parliaments Act 2011 and call an election any time it wanted. In practice, while the government may choose to overturn the Fixed-term Parliaments Act 2011 to give itself more flexibility on the exact date on which the UK goes to the polls, at present, it’s hard to see any reason why it would be motivated to call an early election.
Admittedly life happens as does politics, so it can’t entirely be ruled out, but hopefully, the next five years will at least see stability in government and government policy. This could help to stabilise the Pound Sterling on the international currency markets and thus reduce economic volatility in general, be that in terms of employment, interest rates, inflation or the performance of the stock exchange. This could be of significant benefit to the housing market.
If you’re now thinking of moving, please contact us to see how we can help with your mortgage.