What Is A Retirement Mortgage And Later Life Lending?

And why not? The average UK home now costs £285,000, after increasing by 73% during the past decade. For those that bought in the 1970s, house prices are now 65 times higher than when they first got on the ladder.

Keep reading to find out more about retirement mortgages and later life lending, and how you can get a retirement mortgage.

Can retired people get a mortgage?

Yes, people who have retired can get a mortgage. This is all because banks are now more willing to lend into retirement because mortgage terms are now longer than they once were.

Forced to save for a deposit for longer, first-time buyers are getting on the property ladder later in life. And rising house prices mean many have to stretch their mortgage term over three or four decades to make it affordable. These pressures mean mortgage terms are ending when homeowners are in their 70s. 

But the change in rules also benefits existing homeowners. Now, a borrower in their 50s who is considering remortgaging to finance an extension could find a deal from a mainstream lender.

What is a retirement mortgage?

Technically, a retirement mortgage is a loan that is secured against your property, which commences either prior to your retirement, or whilst in retirement. You normally choose between a capital and interest, or interest-only loan. During the mortgage term, you'll make repayments to either pay your interest and reduce the size or your loan, or just pay off the interest each month.

Retirement mortgages normally arranged under a lifetime mortgage structure, which means they'll continue until the last person has died or moved into permanent care.

Who offers retirement interest only mortgages?

There are numerous banks who offer retirement interest only mortgages, including familiar names like Santander, NatWest and Nationwide who will all lend to borrowers who will be 75 years old at the end of their mortgage term. Metro Bank and Halifax will extend their borrowing by an extra five years to 80-year-olds. 

However, each mortgage lender has different rules for older borrowers, and it can be difficult to know by yourself which banks to apply for and which could reject your application. For example, some lenders will ask you to prove how you’ll maintain your payments once you’ve retired, and others won’t. If any part of your mortgage is on interest-only (which means you’re only paying the interest and not the debt) the lender is also likely to restrict its maximum age.

This is where expert mortgage brokers like Tembo come in.

What is a retirement interest only mortgage?

Retirement Interest Only mortgages, also known as RIOs, are a type of mortgage that's available to homeowners aged 55 and over. As the name suggests, you only repay the interest every month and not the debt. They allow people who have retired to borrow into later life, and are typically offered by building societies including as well as a host of small, regional societies.

Retirement Interest Only mortgages come with many benefits for later life borrowers. The number one benefit is it allows you to borrow into retirement but keep the monthly cost low as you'll only pay the interest each month.

Another benefit of Retirement Interest Only mortgages is there’s no end date to the mortgage. The debt is repaid from the sale of the house when the last surviving homeowner dies, or moves into long-term care. 

Because you’re repaying the interest, you'll also be protecting the equity in your home. When the house is sold and the debt repaid, you can leave behind this equity as an inheritance to your loved ones.

You can use the money to boost your pension income, remortgage for extension works, or to release equity so that you can enjoy a luxury holiday or gift money to loved ones to help them get on the property ladder. 

If you want to repay some of the debt when you have spare cash, you can pick a deal that allows overpayments. And if you have an unexpected windfall in the future and want to clear the debt entirely, most lenders will let you pay back the mortgage penalty-free after your mortgage deal has expired.

What is a Retirement Capital and Interest mortgage?

A Retirement Capital and Interest (RCI) mortgage is like a traditional mortgage because it has a fixed end date and you repay the debt as well as interest. The main benefit of a Retirement Capital and Interest (RCI) mortgage is its flexible upper age limit based on your life expectancy. An RCI mortgage is ideal for homeowners with a generous pension income who want to remortgage but exceed the maximum age of a traditional mortgage. 

Read more: Benefits of an early inheritance

What is a Lifetime Mortgage?

A Lifetime Mortgage is a type of mortgage loan that is secured on your home, which allows you to free up some of the wealth you have tied up in your home. The Lifetime Mortgage does not need to be repaid until you die, or go into long-term care and you can still continue to live in the home. The amount you can borrow depends on the value of your home and the loan is secured against your property.

A Lifetime Mortgage is the most common type of equity release. Unlike other later life lending options you don’t have to make any repayments, making it a popular choice among older homeowners. You can choose to receive the money as a lump sum all in one go or in stages known as drawdown. 

An equity release drawdown mortgage pays out an initial lump sum and gives borrowers access to a pre-approved cash facility, which you can draw down in stages when you like. Plus, you only pay interest on the part of the loan that you have withdrawn. 

Although Lifetime Mortgages are similar to Retirement Interest Only Mortgages, their is a key difference between, which is how a Lifetime Mortgage can impact the equity in your home. With a Lifetime Mortgage, the interest is rolled up and added to the mortgage loan every year. At the start of the next year, your interest payments are calculated on your original mortgage, plus the rolled up interest from last year. 

This means each year your annual interest bill gets more expensive because it is calculated on a growing debt. This is known as compound interest. This results in the size of your debt snowballing after several years, eating into your equity and reducing the amount you can pass on to loved ones. 

Another drawback to Lifetime Mortgages are long-term early repayment charges. Because they are designed to be taken out for life, if you want to repay your Lifetime Mortgage before you die you’ll be charged a penalty. However, there are lots of new deals come with flexible features that allow overpayments or early repayments in certain circumstances. It's worth checking a plan’s flexible features before signing on the line.

Equity release interest rates are also higher than traditional and RIO mortgage rates, which can mean you'll pay more in interest. However, equity release lenders sometimes offer fixed rates for life. This can be great news for those taking out equity release when rates are low, but not so great when rates are high.

How to get a mortgage when you've retired

To get a mortgage when you're retired, you need to apply to a retirement mortgage offered by a lender. The lender will then check you fit their eligibility and affordability criteria, and if you pass they'll approve you for the mortgage. However, they can choose to reject your application if you don't fit their criteria. Each lender has their own criteria which applicants need to be, so it can be difficult to know what you are likely to qualify for and who to apply with.

This is where working with a mortgage broker like Tembo comes in handy. Experienced mortgage brokers will be able to work out what lenders are likely to accept you, as well as find the best deal from a range of lenders.

How to get a Retirement Interest Only mortgage

To qualify for a Retirement Interest Only mortgage, you’ll have to prove to the lender you can afford to pay the monthly interest on your retirement income, not your salary. You’ll also be restricted to borrowing around 45 to 50% of your property’s value.

For joint applicants, it can be tough to pass the affordability test. Most, but not all, lenders want to make sure that you can afford to pay the mortgage by yourself if your partner or spouse dies. 

How to get a Retirement Capital and Interest mortgage

To qualify for a Retirement Capital and Interest mortgage, all borrowers must be aged 55 and over. You can typically borrow around 50% to 60% your property’s value, and the debt should be fully repaid before you die which means you can pass on your home as an inheritance.