Challenger bank Aldermore has launched a new ‘Later Life Lending’ mortgage deal that could help desperate homeowners trapped on interest-only loans they fear they won’t be able to repay.
With an interest-only mortgage, you only pay the interest charged by your lender every month. You don’t pay off any of the ‘capital’ – the amount you actually borrowed to purchase the property – until your mortgage term ends.
People who’ve taken out interest-only mortgages have to find a way of paying back the capital they’ve borrowed by setting up a separate ‘repayment vehicle’ or ‘repayment strategy’, usually through savings and investments.
However, in 2013 the financial regulator found that more than one million people who have interest-only mortgages were facing a shortfall, having failed to find a way to repay their loan. Many of them are retired, making repayment an even greater challenge.
Aldermore is now hoping to target this group, helping retirees to remortgage their properties and pay off the loans when their homes are sold.
Here, Which? explains how Aldermore’s deal works and how it could help you if you’re in this situation.
How do Aldermore’s Later Life Lending mortgages work?
Aldermore has developed a set of mortgages specifically for homeowners aged between 55 and 85. The deals allow homeowners to borrow against their property, or remortgage in order to release cash to fund their retirement or support their family, or to help people stuck on an interest-only mortgage they can’t repay.
You must be 99 years old by the time the mortgage term ends. Your property needs to be valued at a minimum of £60,000 to qualify.
There are two options – you can either take out an interest-only loan, which is to be repaid when the property is sold, or a capital-repayment deal, where you repay both the capital and the interest you’re charged.
The former is crucial. Many people on interest-only deals do not currently have the option to use the sale of their property as a repayment strategy.
- Interested in taking out a repayment mortgage? Use our mortgage repayment calculator to find out how much you’d pay each month based on the interest rate and mortgage term
How much does the Aldermore mortgage cost?
There are four fixed-rate options: two, three, five and 10 years, as well as a variable option.
The maximum you can borrow is £400,000, and you need to have at least 40% equity (the amount of your property you own outright) in your home if you want the interest-only deal, and at least 25% equity for the capital repayment deal.
There is a product fee of £999 to pay.
|Aldermore Later Life Lending mortgages||Interest-only rate||APRC based on borrowing £50,000 over 20 years||Capital repayment rate||APRC based on borrowing £50,000 over 20 years|
If you don’t want to be locked into a fixed-term deal, the charge for the interest-only mortgage is currently 4.18%. The APRC, based on borrowing £50,000 over 20 years, is 4.7%. It’s 4.48% for the capital-repayment deal, while the APRC for the same scenario is 5%.
Can I overpay the loan, or pay it back early?
Aldermore has stated that ‘there will be no limit on overpayments and no early repayment charges on the variable product’, ensuring that borrowers can get what they need and pay it back at the rate that works for them.
If you’re on one of the fixed-rate deals and overpay up to 10% of the outstanding mortgage balance in a year, you won’t be charged. The following early repayment charges will apply if you overpay by more than 10%:
|Deal||Year 1 early repayment charge (ERC)||Year 2 ERC||Year 3 ERC||Year 4 ERC||Year 5 ERC|
Is this the same as equity release?
Aldermore’s Later Life Lending deal sits in the middle ground between a normal residential mortgage and a lifetime mortgage, traditionally known as equity release.
With a lifetime mortgage, you borrow a proportion of your home’s value. Interest is charged on the amount, but nothing usually has to be paid back until you die or sell your home.
The interest is compounded or ‘rolled up’ over the period of the loan, meaning your debt could double in 11 years at current rates. Most lifetime mortgages have a fixed rate of interest. Some providers offer variable-rate lifetime mortgages, but these offer less certainty.
Aldermore’s deal is different in that you have monthly repayments to make. For a two-year fixed-rate deal, borrowing £50,000 over a 20-year term on the interest-only deal would result in monthly repayments of £140.
For the capital repayment deal you’d face monthly repayments of £294, but at the end of the term you’d have repaid all of your debt, which means you would own your property outright.
Aldermore has launched the range of mortgages with selected parters, through whom you can apply. These are OpenWork, AToM, PTFS and Finance Planning.
Are there similar types of mortgages for older borrowers?
Loughborough Building Society offers ‘Borrowing into retirement’ mortgages, which allow people to borrow well into retirement and come with no upper age limit. They’re available on both an interest-only and repayment basis, and allow you to use your property to repay your loan.
Bath Building Society also offers retirement mortgages, which allow you to borrow up to £200,000, although these are interest-only deals.
Shawbrook Bank offers a specialist deal for over 55s. It’s an interest-only mortgage, but requires you to make arrangements to pay off the loan at the end of the term. Hodge Lifetime has a similar product.
Family Building Society has a product that allows you to borrow up to 25% of your property’s value, which can be used to pay off an interest-only shortfall. It has also increased its maximum age limit to 95 at the end of the term.
The Post Office recently launched a retirement-only mortgage, although this does not allow people to remortgage existing interest-only deals.
This story was updated on 21 May 2018 to add more detail about where to apply for the mortgage and APRCs for mortgage rates.