Struggling older borrowers handed interest-only mortgage boost
Older interest-only mortgage borrowers have been given a boost by the launch of a new product targeted at over 55s.
Borrowers who are reaching the end of their interest-only term but wish to borrow for longer have found their options severely restricted in today’s mortgage market.
Moneywise reported this month on the difficulties “mortgage misfits” are facing when they try to access finance. This issue often affects people approaching retirement and those with interest-only mortgages.
But Shawbrook Bank has launched a new product targeted at these borrowers called the 55 Plus Interest-Only Mortgage. With this loan, borrowers can have a new mortgage term of between five and 15 years - as long as they are under 85 by the end of the term.
There are two options for borrowers, depending on how long you want to fix for initially. The three-year fix has a rate of 5.5% and the five-year fixed option charges 6%. Following this fixed period the mortgage reverts to Shawbrook’s standard variable rate (SVR) for the remainder of the term - currently 5.25%. A product fee of £1,595 also applies.
The mortgage also offers customers the full flexibility to make overpayments without penalty, and to repay their mortgage in full at any time – subject to a £120 discharge fee in England and Wales or £180 in Scotland.
Interest-only mortgages enable borrowers to just pay interest on the loan for the term of the deal. But the catch is you’ll need to pay off the entire loan itself at the end of the mortgage term.
Maeve Ward, managing director of residential mortgage, says: “For many, the prospect of selling a cherished family home when an interest-only deal is coming to an end is an emotional wrench, especially when the ability to continue paying a mortgage remains.
“This new product not only provides peace of mind to those who do not want to sell their homes, or withdraw from their pensions, but also gives them the opportunity to borrow further to fund their future plans.”
Every mortgage lender has a standard variable rate of interest, or SVR, on which it bases all its mortgage deals, including fixed and discounted rate and tracker mortgages. When special deals come to an end, the terms of the deal usually state that the borrower has to pay the lender’s SVR for a period of time or pay redemption penalties. The lender’s SVR is, in turn, based on the Bank of England’s base lending rate decided by the Bank’s Monetary Policy Committee (MPC). Every time the MPC raises its rate, mortgage lenders generally increase their SVR by the same amount but when the MPC lowers its rate, lenders are often slow to pass this on or don’t pass on the full cut to borrowers.
A loan in which the borrower pays only the interest on the sum borrowed for the life of the mortgage but, at the end of the mortgage term, they still owe what they originally borrowed as this remains unchanged. The advantage of an interest-only mortgage is the monthly repayment is considerably lower than for a comparable repayment mortgage. Lenders generally insist the borrower also invests in an endowment, ISA or pension savings policy that, on maturity, is intended to pay off the capital loan.