British borrowers who find themselves unable to afford their repayments from their interest-only mortgages at the point of their expiry will be able to acquire a fresh mortgage deal till they die, as Santander officially unveiled plans to provide lifetime mortgages from next year.
The new deals will enable Santander clients to carry on exclusively repaying the interest on their mortgage – rather than the loan itself – until the date they die, after which the bank would recover the remaining balance on the mortgage by selling off the deceased’s home.
However, questions will be asked about whether the new products will undermine the values of independence and homeownership, as those who use the deal will effectively have their home owned by the bank, with no security for their surviving relatives if they were to unexpectedly pass away.
Interest-only mortgages are loans that allow borrowers to pay less on their monthly repayments, with the shortfall that they are only paying the interest on their mortgages, rather than paying any of their actual loan off. Furthermore, users are expected to have paid the full balance – both interest and the loan itself – by the time the mortgage term ends, meaning they both prevent users from attaining a real equity stake in their home and cause them to pay far more back in the long-term than someone using a traditional secured loan deal.
Trend analysts have forecasted that about 150,000 interest-only mortgages will mature each year from now to 2020, with the inaugural peak expected in the financial year 2017/2018.
The new lifetime mortgages – which are expected to be released as soon as 2015 – would be targeted at people whose deals are set to expire in the near future but do not have the logistics to repay their mortgages. Instead of being forced to sell their home or have it repossessed, they will now have the option to sign up to a lifetime deal which will secure their current arrangement until they die.
This could allow them to stay in their current home without having to sell the property or downsize.
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.’
Despite the innovative nature of the proposed lifetime mortgages, finance specialists have warned that borrowers will need to have deep conversations with their families about the financial ramifications of doing so in the event that they were to pass away. In particular, the areas of inheritance and residence have been highlighted as key issues to consider before committing to the new products.
Interest-only mortgages have garnered widespread criticism for promulgating the financial problems of household’s in the UK, through the encouragement of sweeping their mortgage repayments under the cover and remortgaging when their full-repayment date draws close.
Theoretically, the accounts are supposed to be used in order to provide homeowners with enough time to gather and save the money to fully repay their mortgages, but in reality this rarely occurs, and people are usually forced to hedge their bets on the price of their homes going up in order to release enough equity to pay them off and downsize later on down the line.
Last year, the City Regular highlighted that a staggering 1.3 household’s were currently failing to save enough money to afford the long-term costs of their interest-only mortgages, with official forecasts estimating that house’s could fall as substantially short as £50,000.
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