Proposals being considered by the Financial Conduct Authority would allow retired homeowners to take out loans that are repaid after death.
Currently banks are forbidden to lend where borrowers do not have a clear means of repaying their capital.
This can force some owners – who would be capable of affording “interest only” mortgage repayments – to sell their properties or get locked into expensive “equity release” deals when they get older.
Now the FCA says it “has identified a regulatory barrier to a form of mortgage lending that could meet the needs of some older borrowers”, including those with maturing interest-only mortgages and no repayment vehicle, and those seeking to release equity from their homes.
As a result, the watchdog wants to allow retirement interest-only mortgages. Borrowers must still be able to afford the ongoing payments. Ultimately the loan would be repaid through the sale of the property, usually on the death of the customer.
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Malcolm McLean, senior consultant with actuaries Barnett Waddingham, said there could be some advantages to a “retirement mortgage” if borrowers are responsible.
“Compared to equity release – where interest is rolled up and compounded over the duration of the loan, resulting in rapid erosion of the housing funds available for a bequest – this new deal will be cheaper.
“Also, such a mortgage would enable a person reaching retirement with an outstanding home loan to pay it off and substitute the interest-only one in its place. Many of these people might otherwise have to resort to selling, downsizing or turning to their savings or pension pots to clear the mortgage.”
However, he also warned: “People need to be careful late in life in taking on a lifelong debt when it is not absolutely necessary for them to do so. Unlike equity release, they will not be required to seek financial advice before proceeding.
“One way or another it is a debt which eventually has to be repaid.”
Former pensions minister Baroness Altmann backed the change, saying: “Interest-only mortgages can be much better for people than being forced to sell their home and move into rented accommodation. It is also much better value for most people than using equity release.
“Those who don’t want to move house and do not have enough money to own their home outright have often faced desperate hardship when lenders refuse to allow them to keep borrowing into retirement.
“Obviously, if people can downsize and release some value from their home it will help their finances but it seems wrong for lenders to discriminate against people just because of their age.”
Highlighting a growing problem for retirees, recent research from the Centre for Economics and Business Research and retirement lending specialists more 2 life revealed that growth in unsecured debt levels for the over-75s was higher than for any other age group.