Three-quarters of all borrowers aged 60 and older have interest-only mortgages, and about a third of these will have to be fully repaid within the next four years, according to a new analysis which questions whether lenders will foreclose on indebted elderly customers, or extend forbearance.
Although foreclosure rates for older borrowers are lower than those for younger ones, arrears rates are 1.2 times higher, according to the report released by Moody’s Investors’ Service.
However, Moody’s said the systemic risks presented by these loans was limited, with less than a fifth of those buying with a mortgage aged 55 or over, and just 3.9 per cent aged 65 and over.
Elderly borrowers, who are considered “vulnerable” by regulators, are likely to be treated more leniently to avoid the bad publicity that would accompany evictions. Moody’s research concludes that in general, the value of outstanding loans issued to this group are likely to be relatively low, compared to the value of the property.
“Over the next two years, older borrowers will manage to avoid repossessions due to a mix of lender forbearance and manageable affordability,” Moody’s said, noting that recent regulatory guidance is forcing banks to scrutinise their interest-only loan books, with a particular focus on those that are nearing maturity.
“For those that are unable to repay at maturity, lenders are using forbearance to extend the maturity of the loan, often in combination with a requirement to switch to a repayment loan,” the report said.
Moody’s analysis is based on its review of UK residential mortgage-backed securities, which are generally representative of loans remaining on bank balance sheets.
In earlier analysis, Moody’s concluded that interest-only loans did not necessarily have a higher default rate than other types of loans. However, other characteristics more closely associated with default are much more common among older borrowers. For example, 40.2 per cent of older borrowers are classified as self-employed, compared to only 18.2 per cent of younger borrowers. Loans that are remortgages account for 62.1 per cent of all loans to older borrowers, compared with 42.3 per cent for younger ones.
And while loans to older borrowers have lower loan-to-value ratios – 52.1 per cent compared with 74.0 per cent for younger borrowers – older adults score more highly when other risk factors are measured. For example, they are more likely to have self-certified their income, and are also more likely to be reliant on a single income.
In recent years, the Financial Services Authority has expressed concern about therising number of older borrowers seeking mortgages, and rising levels of indebtedness among older age groups generally. Although new rules for lenders do not set maximum ages for borrowing, they do require that likely changes to a borrower’s income over the term of the mortgage be taken into account, a change which can often come in retirement. It also bars lenders from relying on a sale of the property at the mortgage’s maturity for repayment.