There are currently very few options for older people wanting to continue their mortgages into retirement. While many lenders have relaxed their upper age limits for residential mortgages – for example Halifax’s is now 80 and Nationwide’s 85 – there are catches.
You must be able to prove that you can afford to make monthly mortgage repayments in retirement, and so pass the lender’s ‘affordability’ checks. Unless you are lucky enough to have a final salary pension scheme (e.g. if you are a teacher or are employed by your local Council) then it is very unlikely that you will be able to confirm your retirement income. No proof, no pass on affordability tests.
Additionally, with interest only mortgages, many lenders still insist on a repayment vehicle that will be needed to settle the mortgage at the end of the day. Otherwise, the only option left would be a capital & repayment mortgage, (where your monthly repayment is made up of the interest and a portion of the amount you’ve borrowed). Practically this means that your monthly mortgage payment may be higher when compared to an interest-only mortgage, as you are repaying capital & interest over a shorter term.
The financial industry watchdog, the Financial Conduct Authority (FCA) has been concerned for some time that there are not enough mortgage options for older people and rightly so, as the statistics are worrying.
In late 2017, the FCA produced a report which revealed that there are currently 1.67 million full interest-only and part capital repayment mortgage accounts outstanding in the UK. They represent 17.6% of all outstanding mortgage accounts and over the next few years increasing numbers will require repayment. Furthermore, the FCA found that 70% of all interest-only and part capital repayment mortgages are held by customers aged over 45. Additionally, the proportion of 45 to 54-year-old mortgage holders with an interest‑only residential mortgage is higher than for all UK adults at 15% compared with 11%.
According to the FCA's own data, those aged 65 and over with a mortgage are also significantly over‑represented when it comes to interest‑only mortgages. They make up one in nine of all interest‑only mortgage holders, whereas overall, they are just 3% of the mortgage‑holding population.
It's understood that many in this situation have no idea how they'll be able to repay their interest-only mortgage and are financially vulnerable.
The advantages of lifetime mortgages (which are the most popular form of equity release) is that you don’t have to sell your home and importantly you always own it 100%. Compared to residential mortgages, there are no affordability checks to pass and lifetime mortgage lenders are more lenient with regards to adverse credit situations. Hence, homeowners with missed payments or even CCJ’s can be accepted for lifetime mortgages and still be able to make repayments.
Money released via equity release schemes is tax-free and yours to spend as you wish. Typically, there are no monthly repayments and the amount borrowed plus the interest that has ‘rolled up’ is repaid when you move into long-term care or die. There are potential downsides with compounding of interest that homeowners considering equity release must be aware of. The main one being that the interest can grow quickly and will reduce the amount you have left to pass onto your beneficiaries (e.g. your family and friends). But to put that into context, if house prices continue to rise, even modestly, then your inheritance won’t be as greatly affected.
So, while older homeowners do have options to repay their interest-only mortgages or to tap into their home’s equity, the Financial Conduct Authority wants consumers to have more choice and so it relaxed the rules on interest-only mortgages in March 2018.
Previously, in order to qualify for an interest-only mortgage, borrowers had to be able to show they had a credible capital repayment strategy, such as savings, investments or another property.
Selling their home to repay the mortgage when they died or moved into full-time care was mostly ruled out. This meant that even when retired borrowers were comfortably meeting their interest payments each month, they couldn't extend their mortgage term if they were ultimately relying on the sale of their home to repay the debt. But with the change in rules by the FCA, lenders can now accept the sale of the property as the ‘repayment vehicle’.
In turn, this has created the opportunity for lenders to develop retirement interest-only mortgages (RIO’s). As the rules were only changed in March, it’s not surprising that there are no specific products available currently, but this is bound to change in the near future as lenders develop the finer details of these products.
Much has been made regards the introduction of Retirement Interest Only Mortgages. However, fully known to the current equity release advisory firms are the likes of the Hodge Retirement Mortgage products – 55+ Mortgage & their Retirement Mortgage. These offer either a fixed term mortgage in retirement, or even a lifetime mortgage in retirement, where monthly payments of interest only can be made. Additionally, there are lenders such as Family Building Society, Marsden and Shawbrook who offer mortgages into retirement & a list of these plans can be found on our Equity Release Comparison tables.
Some lenders are currently trying to make in-roads into the retirement lending space such as the Post Office, which has just launched an interest-only mortgage for older borrowers. However, the catch here is that you must be mortgage-free (unencumbered) and already own your home outright. So these new plans still have some way to go to facilitate many existing mortgagors and not necessarily the best solution for the tens of thousands of older borrowers with an interest-only mortgages who simply want to extend their mortgage into retirement.
While retirement interest-only mortgages are a welcome addition to the borrowing options of older homeowners, complexity can also create confusion.
This only highlights the importance of speaking to an impartial, specialist financial adviser in this field to understand your options. Here at Equity Release Supermarket all our retirement lending specialists are training in both residential and equity release mortgages, thus they can search the whole of both markets to find you the best solution.
Your local, expert adviser at Equity Release Supermarket can be located on our website, or you can call our Freephone 0800 678 5955 or email them using firstname.lastname@example.org and they’ll get straight back to you.