Your mortgage options
As you may have already found out, getting a mortgage in later life isn’t always straightforward. Many lenders have an upper age limit of 65-70 and typically want the loan repaid before the higher age.
But don’t worry just yet, there are signs that this is changing. Lenders are now waking up to the fact that more of us are living longer and need mortgages designed around our needs in later life. A range of new mortgage products – like retirement interest-only mortgages (RIOs) and retirement capital and income mortgages (RCIs) – are appearing that have been specifically designed for people who are approaching or are in retirement.
What are my other options?
Before you take out an over-55s mortgage it’s sensible to talk to an independent financial adviser to talk through the options available to you. Some options to discuss are:
- Talk to your current lender - they may let you extend your current interest-only mortgage.
- Equity release - there are two types of equity release product – lifetime mortgages and home reversion plans. These are designed to help over 55s to access money tied up in the value of their homes.
- Savings and investments
- Local Authority grant
- Family support
- Personal loans or credit cards
What is a retirement interest-only mortgage?
A retirement interest-only mortgage is a new kind of product designed to help people over the age of 55 who might find it difficult to get a standard mortgage.
With this kind of retirement mortgage there’s no fixed end date. You simply pay the interest throughout the term of the loan, with the loan amount being repaid only when you sell your house, move into a care home or pass on. So you only need to be able to prove that you can afford the interest payments.
Some lenders also offer retirement capital and interest mortgages which let you pay off some of the capital (the loan) alongside the interest payments during the loan period. This can help you to ensure that there is more to leave to your loved ones after you pass on.
What if my current interest-only mortgage ends soon?
If your current interest-only mortgage term comes to an end in the next few years you might also find it difficult to get a standard mortgage and could end up facing the prospect of selling and downsizing to pay the debt off. If this is the case, a retirement interest-only mortgage (RIO) might be the solution for you.
There were 1,023,000 pure interest-only mortgages outstanding at the end of 2019. [i]
What are the pros and cons of a RIO?
- A retirement interest-only mortgage allows you to stay in your home.
- Compared with a standard capital and interest mortgage, interest-only payments tend to be lower.
- There is no fixed end date.
- RIOs are also simpler to apply for, as you only need to prove you can pay the interest.
- You will need to demonstrate you can afford to pay the interest from your retirement pension income.
- Your home is at risk if you cannot afford to make the repayments.
- Your home will need to be sold off to repay the loan meaning your family won’t inherit it?
How can I get a RIO?
Most of the big mortgage providers and building societies offer these later-life mortgages.
If you opt for a retirement interest-only mortgage (RIO), bear in mind that you won’t be able to borrow as much as with a retirement capital and interest mortgage (RCI) where you repay the loan amount as well as the interest charged on it. For example, you could potentially only borrow 50% of your home’s value with a RIO, but up to 65% with a RCI.
There are other requirements such as a minimum property value, minimum income and minimum loan size. Each lender has different requirements. You can see some of them at Which?
Your lender will make an affordability assessment based on your retirement income. These are typically based on the lowest earner in the household.
Retirement interest-only mortgages vs lifetime mortgages
Retirement interest-only mortgages are slightly different from equity release (lifetime mortgages). With a lifetime mortgage you borrow a proportion of the value of your home. However, unlike an RIO or an RCI, you don’t make any monthly payments.
The debt is paid off when you pass on, move into long-term care or your property is sold. Many of these also now come with a no negative equity guarantee that ensures you’ll never owe more than the value of your home.
With a lifetime mortgage, you don’t pay off the interest or the loan, so the amount grows over the term and can leave you with a large debt to pay off. This can erode the value in your home. This is not the case with a retirement interest-only mortgage.
What costs are involved?
Let's look at some example costs:
Property value: £200,000
Loan: £100,000 (50% of the value)
Interest rate: 5% (Fixed)
Let’s say your property is worth £300,000 15 years later. At this point you need to go into a care home and your property is sold.
Here’s how that would work out for the two options:
Equity release (lifetime mortgage)
Monthly repayments: £0
Total loan amount after 15 years: £211,370
What’s left when your house is sold for £300,000: £88,630
Monthly repayments: £417
Total amount of interest you’ll pay over 15 years: £75,055
Total loan amount after 15 years: £100,000
What’s left when your house is sold for £300,000: £200,000
The importance of getting independent advice
As with all mortgages and equity release options, we strongly advise that you talk to a professional independent financial adviser before you make a decision. They will be able to talk you through the options and help you to make the decision that’s right for you.
You’ve probably heard a lot about equity release. Learn how it works and whether it’s the right option for you and your retirement plans.
The information on this page was sourced between June - October 2020 and updated in April 2021. Information on this site does not constitute any form of advice, representation, or arrangement by us and you take full responsibility for making (or refraining from making) any specific investment or other decisions. You should take independent financial advice from an adviser who is registered by the Financial Conduct Authority.