Mortgage rates are at a 15-year high and, with further interest rate rises expected this year and into 2024, many homeowners in later life are facing into some tough decisions.
According to data from UK Finance, there are around 800,000 fixed-rate deals ending in the second half of 2023, and around 1.6 million deals due to end in 2024, which will leave many homeowners feeling under financial pressure.
Homeowners nearing the end of a fixed mortgage deal, and used to paying rates as low as 2%, are navigating a very different market with an average two-year fixed-rate mortgage priced at 6.8%, and an average five-year fixed-rate around 6.28%, according to Moneyfacts. On a £100,000 interest-only mortgage that could see payments increasing from £167 per month to over £525 per month for a five-year fixed-rate deal.
And interest rates are particularly steep for homeowners that revert to a standard variable rate (SVR) once their fixed deal ends, with the average rate currently 8.5%, according Uswitch. On a £100,000 interest-only mortgage, average monthly payments would increase to £705 per month. That’s a 322% increase in monthly payments.
However, those coming to the end of fixed rate deals are not the only people who will be challenged by the current market. Those people in rented properties have seen their rental outgoings increase by an average of over 11% in the last year, Zoopla figures found. We are also seeing mortgage prisoners, people unable to switch mortgages to a better deal, with Money Saving Expert data indicating they’re now paying interest rates over 9% on their loans. This is having a particularly damaging impact on people’s financial wellbeing, with homeowners looking at second jobs or other sources of income to try to make ends meet.
This all has significant ramifications for borrowers, but particularly for those entering, or in, retirement. Many borrowers in their 50s and 60s stay on an SVR because they think their age is a barrier to remortgaging. However, borrowers in this situation could explore alternative solutions, like Retirement Interest Only (Rio) mortgages.
Alternative lending solutions in later life
RIO mortgages can help customers aged over 55 who are looking to pay off an existing mortgage, or looking to purchase a new home. Borrowers are able to tie in to a fixed rate RIO mortgage for 2,5 and even 10 years. However, there will still be uncertainty over what the interest rate will be when the fixed period ends. Legal & General has overcome this concern by offering a Rio mortgage with a rate that is fixed for the life of the customer. With a maximum loan-to-value (LTV) of 60% this provides certainty and means customers won’t have to worry about future interest rate volatility and the risk of their payments increasing during retirement.
Given higher interest rates across all forms of borrowing, accessing higher LTVs has become more difficult with the maximum LTVs available in the later life lending market reducing. Based on our own analysis, the maximum LTV for a 70-year-old customer on a lifetime mortgage has reduced by over 10% from 48% in July 2022 to 37.2% today, our data finds. The impact of interest on rolled up loan balances will also have increased – which means the benefit of servicing interest to limit the loan increasing with interest are even greater now.
In the past, more favourable rates on standard mortgages have seen products such as RIOs overlooked in preference of more flexible options. However, as customers look for greater stability, we expect demand to increase. By fixing for life, homeowners also benefit from the stability of one trusted provider. Short term fixed mortgages – on RIO and residential lending – require a ‘stress test’ to ensure the customer could continue to pay the mortgage if rates were to increase once the deal comes to end. A fixed for life loan carries none of that risk and so stress testing is not required. It could also save thousands on fees from switching between products.
Switching mortgage products can cost on average £1,000. For someone paying a £1,000 fee and locking into two-year deals each time, that’s another £5,000 in fees paid out over 10 years, on top of paying off the mortgage. These fees are often ignored and added to the mortgage – which can amount to a significant cost burden over time.
Impossible to predict the future
For all their benefits, Rio mortgages do come with several considerations for borrowers. If a homeowner commits to a lifetime fixed-rate mortgage at current rates of 6.89%, then if mortgage rates reduce in the future, a client’s payments wouldn’t follow suit. And, if an individual’s circumstances changed, especially early on in the mortgage and they wanted to end the deal, there would be charges for leaving early. Another important consideration is the affordability criteria, and providing evidence that the fixed repayments can be met in future based on future income, for example from pensions.
However, we believe that in today’s uncertain high interest rate environment, alternative fixed rate solutions, such as fixed for life Rios, will be increasingly popular options for people that want the peace of mind of knowing their monthly payments won’t change.
Rios will not be suitable for everyone, however, they should be considered where appropriate and discussed with a qualified adviser, as part of holistic modern later-life financial planning.
Andrew Gilbert is product director at Legal & General Home Finance
