If you think you may need more money in retirement and are researching your options, you may have come across the phrase ‘later life lending’ and wondered what it entails. Well, it’s quite simple, really. Later life lending is a term used to describe several types of borrowing designed for homeowners, typically over the age of 55.
Unlike conventional, residential mortgages, where the bank or building society usually insist that you repay it fully by age 70, there can be no definitive repayment date with later life lending.
So, if you have financial dreams to make a reality, read on to discover more about your borrowing options.
Why is later life lending becoming so popular?
‘Later life lending’ is a collective term used to describe three types of borrowing: equity release (which comprises of all types of lifetime mortgage and the less popular home reversion schemes), retirement mortgages, retirement interest-only (RIO) mortgages.
Later life lending through a lifetime mortgage has increased in popularity over recent years for a number of reasons.
Firstly, it has never been safer and there are many consumer protections in place. The Equity Release Council (ERC) – the governing body of the industry - and the Financial Conduct Authority (FCA) – the Government’s financial watchdog - ensure that the financial advice given when taking out a lifetime mortgage is of the highest standard. Other safeguards include a no-negative equity guarantee (so that your beneficiaries are never out of pocket when the plan is repaid) and the involvement of an independent solicitor – to manage all the legal aspects of the process on your behalf.
It is also circumstantial. Life expectancy is increasing, and state pensions are being stretched; which can be a double bust for those hoping for a comfortable retirement.
And lastly, interest rates on lifetime mortgages have never been so low and their range of flexible features are expanding all the time, making it easy to create a tailored plan to meet your needs both now and in the future.
But a lifetime mortgage is not your only option to consider when looking into later life lending. Let’s look at these in more detail.
Which later life mortgage is right for me?
Retirement and RIO mortgages are primarily designed to enable you to carry your existing residential mortgage into retirement, but they can also be used to borrow more money, if the value of your home (and the size of your outstanding mortgage) make this possible.
If you don’t have a mortgage anymore, then either of these retirement mortgages can be used to borrow money in later life.
As its name suggests, a retirement mortgage enables the homeowner to continue their mortgage into retirement.
The main benefits of a retirement mortgage are that you could borrow more than through a lifetime mortgage and the interest rates available may be lower. Moreover, once the mortgage is repaid, all the equity within the property is yours.
The downsides are that you must be able to pass the lender’s affordability checks to qualify – by proving that you (and your partner if something should happen to you) both have sufficient incomes to make the mortgage repayments both now and in the future.
Secondly, these are residential mortgages, which means that your home could be repossessed if you fail to make your repayments.
Retirement mortgages come with two repayment options:
- Interest only – where the interest charged is repaid on a monthly basis, hence the balance remains the same as the original loan. Interest only mortgages will need a form of repayment at the end of the term such as an investment plan, or sale of another property.
- Capital and Interest - where both these elements of the mortgage are paid monthly, thus resulting in the loan reducing over the years, until finally repaid at the end of the term.
Retirement mortgages, like residential mortgages usually come with an initial product offer over a set number of years, (e.g. 5 year fixed rate). Once this has expired you will then need to select another rate, or remortgage to another lender.
Either of these two options come with the associated costs to pay, plus there is no guarantee what the interest rate you pay will be in the coming years.
And lastly, you don’t have to take financial advice to get a retirement mortgage.
Retirement interest-only (or RIO) mortgages work in a similar way to retirement mortgages, in that they are also based on income and affordability of the applicant(s). They also come with the same warnings with regards to meeting monthly repayments and the associated pitfalls if you don’t – i.e. the potential repossession of your home.
The main difference is that whereas a retirement mortgage runs for a fixed term, RIO mortgages have no end date and therefore run until the last survivor has died or moved into care. This works on the same principle as a lifetime mortgage, however RIO’s do not come with the Equity Release Council standards or a no negative equity guarantee.
With RIO’s you are only repaying the monthly interest accruing on the mortgage and so the balance remains level throughout the life of the loan. Hence, these are a form of interest only lifetime mortgage.
Equity release plans
Equity release plans work differently to retirement or RIO mortgages because you are not converting and carrying your existing residential mortgage into retirement.
The only commonality is that you are borrowing money against the value of your home, for which you will be charged interest, which has to be repaid at some point in the future.
There are two types of equity release plan available to you – a lifetime mortgage and a home reversion plan. Here we will focus on lifetime mortgages simply because home reversion plans are rarely used these days. But you can find out more about home reversion here.
With a lifetime mortgage, you use the money you borrow to firstly repay your current mortgage (if you have one) and then the tax-free money is yours to spend on what you want. While lifetime mortgages might not be right solution for you, they offer many benefits when compared to both retirement and RIO mortgages.
Firstly, you don’t have to pass affordability checks to prove that you can repay a lifetime mortgage. The only factors the lender considers when deciding how much to lend, are the age of the youngest borrower (which must be at least 55) and the value of your house.
Secondly, you don’t have to make any form of regular repayments. If you choose not to repay any of the money borrowed, then the interest accruing on your plan will be repaid when it ends – that is when you die or move into long term care. This is the most expensive option with a lifetime mortgage as the final amount to be repaid can be significantly higher than the amount you borrowed. For example, if you borrow £100,000, at an interest rate of 4.5%, then the amount to be repaid will have doubled to £200,000 after 16 years.
That said, lifetime mortgages offer a range of repayment options to allow you to control the final amount to be repaid.
You can choose an interest-only plan – where the accruing interest is repaid monthly – so that only the initial amount borrowed is repayable when the plan ends.
Or you could opt for a drawdown plan – where you borrow against your ‘pot’ over time. For example, if you could borrow £100,000, then this is your ‘pot’. Once you initially take £10,000 from it, you are then free to dip into it at any time in the future. The advantage here is that interest is only ever charged on the amount borrowed.
With either of these options, you can also make additional repayments – typically up to 10% of the amount borrowed each year. (The maximum allowance is now 40% p.a.) These are known as voluntary repayments and if you have the available funds, could be an ideal way to dramatically reduce the final amount to be repaid, or clear it altogether.
Some of the other benefits of lifetime mortgages include that the interest rate you pay is fixed for life and as they are governed by the Equity Release Council – all plans come with a no negative equity guarantee as mentioned above.
The downsides of a lifetime mortgage are that if you choose not to manage the interest on your plan, or make overpayments, then the final amount to be repaid could be significantly higher than that which you first borrowed.
Historically, lifetime mortgages have also come with hefty early repayment charges (ERCs), should you want to fully repay your plan. However, there are now many plans to choose from that offer fixed term ERCs, making full repayment affordable.
Of course, this is just a snapshot of your later life lending options. To ensure that you are making an informed financial decision, it is worth using the ‘Compare Deals’ tool that is only available at Equity Release Supermarket.
We are the only broker website that allows you to compare all three forms of later life lending, making the process of understanding your options as simple as possible.
Or you may prefer to speak to one of our independent and expert financial advisers, You can call us today on 0800 802 1051 or email [email protected]
Whichever option you choose, we’re here to help.