Lender mulls pay-till-you-die mortgages

Santander confirmed it is considering offering home owners who will be unable to pay off their interest-only deal the opportunity to switch to a repayment mortgage which could potentially last for the rest of their lives.

The possibility of the lender offering a lifetime mortgage is still in development stage, but it could potentially mean that any outstanding amounts left on the home loan would be recouped by the lender upon the sale of the home, which could happen within the customer’s lifetime or after their death. The remaining proceeds from the sale would be for the customer, or their estate, to keep.

Such moves could enable people who have insufficient plans in place for how they will repay their interest-only mortgage to remain in their home, without having to downsize or even face repossession.

Someone taking up the product being considered by Santander would see the size of their loan reduce as they would be paying off chunks of it and interest would not be added to the outstanding debt.

But experts also warned that someone considering such an option would need to have detailed conversations with their family members, who could end up forfeiting portions of their inheritance.

Other lenders may decide to follow Santander’s lead as the industry is putting a strong focus on making sure people do not run into trouble when their interest-only term comes to an end.

A spokesman for Santander said: “As a responsible lender it is right we consider all options for allowing customers to stay in their homes and we are doing this. Offering a lifetime mortgage is one option we are considering for 2015.

“The concept is still in development. However, our current thinking is that we would expect interest to be paid, as this is not a forward purchase of the property, and we would need to be satisfied that the borrower could continue to pay the interest.”

Interest-only deals allow borrowers to pay off the capital only when the mortgage term ends, enabling them to maximise their borrowing capacity.

But in 2013, the City regulator warned people were failing to put aside enough money on up to 1.3 million of the interest-only mortgages that are due for repayment over the next 30 years. Estimates suggested around half these shortfalls will be more than £50,000.

In April this year, new mortgage lending rules came into force which mean tougher checks for people trying to remortgage to another deal.

Banks and building societies have been stepping up moves to offer help to those who may have problems, through letters, phone calls, meetings and home visits.

In June, the Council of Mortgage Lenders (CML) said lenders had met a commitment they gave to contact interest-only borrowers whose deals are set to mature by 2020.

Around 150,000 interest-only mortgages are set to mature every year between now and 2020 and the CML has described the responses it has had from home owners so far as an “encouraging start”.

The difference between what Santander is considering and traditional equity release products is that borrowers do not usually have to repay the interest. However, the Equity Release Council said that some newer equity release products do give people the flexibility to pay interest if they want to.

Nigel Waterson, chairman of the Equity Release Council, said: “We welcome any new entrants to the market that provide consumers with more choice and flexibilities on the proviso that the existing high standards of advice and safeguards in the sector are upheld.

“We would urge all banks and other lenders looking to offer lifetime mortgages to join the Equity Release Council, sign up to the industry code of conduct and give customers the assurances that they will retain the right to tenure and never owe more than the value of their homes.”

He said a number of products its members now offer give consumers the option of paying interest.

Mr Waterson added: “We’d always recommend that customers discuss their decision with those closest to them so that family are aware and accepting of their choice.”

Andrew Montlake, director of mortgage broker Coreco, said there is “definitely a place in the market” for what Santander is considering.

He said: “There are going to be people who come to the end of their mortgage and they don’t want to sell their property or can’t sell their property.”

But he cautioned: “It does become quite an emotive issue with family members because potentially you’re giving away your inheritance. It needs to be something that’s thought about very carefully, as well as other options.”

In 2012, Martin Wheatley, who has since been appointed chief executive of the Financial Conduct Authority (FCA), described the interest-only mortgage problem as “a ticking time bomb that’s been created over the last 20 years”.

Interest-only deals are set to mature in a series of waves, with the first wave over the coming years typically including people approaching retirement with large amounts of accumulated wealth.

The second wave will hit around 2027/28, as a result of deals sold during the last house price boom. Borrowers in this wave are expected to be middle aged and less well off.

The third and final wave will strike around 2032, and is likely to include concentrations of people who are more heavily-indebted.

Bernard Clarke, spokesman for the CML, said: “The obligation to pay off an interest-only mortgage at the end of its term lies with the borrower.

“Lenders have been contacting their interest-only customers to make sure they understand their commitments, and to encourage them to continue to make sure their repayment plans are on track.

“Many interest-only borrowers do have an adequate repayment plan in place. For those that face a shortfall, there will be a range of options - but these will vary depending on individual circumstances.”