Challenger bank Aldermore has launched a brand new ‘Later Life Lending’ mortgage deal that may help desperate homeowners trapped on interest-only loans they fear they won't have the ability to repay.
With an interest-only mortgage, you pay the interest charged from your lender every month. You don’t repay the ‘capital’ – the amount you actually borrowed to purchase the home – until your mortgage term ends.
People who’ve taken out interest-only mortgages need to find a way of paying back the capital they’ve borrowed by establishing a separate ‘repayment vehicle' or 'repayment strategy’, usually through savings and investments.
However, in 2013 the financial regulator discovered that more than one million those who have interest-only mortgages were facing a shortfall, having didn't try to repay their loan. Most 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 remove the loans when their houses are sold.
Here, Which? explains how Aldermore's deal works and how it might help you if you are in this situation.
How do Aldermore’s Later Life Lending mortgages work?
Aldermore is promoting a set of mortgages especially 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 loved ones, in order to help people stuck with an interest-only mortgage they can’t repay.
You should be 99 years of age when the mortgage term ends. Your property needs to be worth no less than lb60,000 to qualify.
There are two options – you may either take out an interest-only loan, which is to be repaid once the property is sold, or a capital-repayment deal, in which you repay both the capital and also the interest you're charged.
The former is crucial. Lots of people on interest-only deals do not currently have the option to use the sale of the property like a repayment strategy.
How much will 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 are able to borrow is lb400,000, and also you need to have at least 40% equity (the amount of your property you have outright) in your home if you would like the interest-only deal, and a minimum of 25% equity for that capital repayment deal.
There is a product fee of lb999 to pay.
|Aldermore Later Life Lending mortgages||Interest-only rate||APRC based on borrowing lb50,000 over 20 years||Capital repayment rate||APRC based on borrowing lb50,000 over 20 years|
If you won't want to be locked into a fixed-term deal, the charge for the interest-only mortgage happens to be 4.18%. The APRC, according to borrowing lb50,000 over Two decades, 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 borrowed funds, or repay it early?
Aldermore has stated that 'there will be no limit on overpayments with no early repayment charges on the variable product', making certain borrowers can get what they desire and pay it back in the rate that works on their behalf.
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 a lot more than 10%:
|Deal||Year 1 early repayment charge (ERC)||Year 2 ERC||Year 3 ERC||Year 4 ERC||Year 5 ERC|
Is this just like equity release?
Aldermore's Later Life Lending deal sits in the centre 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 around the amount, but nothing usually has to be paid back until you die or sell your house.
The interest rates are compounded or ‘rolled up’ within the period of the loan, meaning your financial troubles could double in 11 years at current rates. Most lifetime mortgages possess a fixed interest rate of interest. Some providers offer variable-rate lifetime mortgages, however these offer less certainty.
Aldermore's deal is different for the reason that you've monthly repayments to make. For a two-year fixed-rate deal, borrowing lb50,000 on the 20-year term on the interest-only deal would result in repayments of lb140.
For the main city repayment deal you'd face monthly repayments of lb294, but after the word you'd have repaid all your debt, which means you would own your property outright.
Aldermore has launched the plethora 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 are available with no upper age limit. They're available on both an interest-only and repayment basis, and allow you to use your property to settle your loan.
Bath Building Society also offers retirement mortgages, which let you borrow as much as lb200,000, although these are interest-only deals.
Shawbrook Bank provides a specialist deal for over 55s. It's an interest-only mortgage, but requires you to definitely make arrangements to pay off the borrowed funds at the end of the term. Hodge Lifetime includes a similar product.
Family Building Society includes a product that allows you to borrow up to 25% of the 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 Mailbox recently launched a retirement-only mortgage, even though this doesn't allow people to remortgage existing interest-only deals.
This story was updated on 21 May 2022 to include more detail about where to make an application for the mortgage and APRCs for mortgage rates.