Not so long ago, turning 65 years old meant no more work, a state pension and the ability to pay off a mortgage. But times have changed.
The state pension age is inching further into the future and there are far fewer gold-plated workplace pensions guaranteeing a comfortable retirement for life.
People are working for longer and looking to the equity in their homes to plug the pension gap, pay off debts, help family, improve their homes and enhance their lifestyles.
And why not. The average UK home now costs £244,100, after increasing by around £80,000 during the past decade according to analysis by Zoopla.
If you want to access mortgage finance later in life, here’s how.
Traditional lending for longer
High street banks’ reluctance to lend to the over 65s has changed. 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.
Santander, NatWest and Nationwide 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.
Each mortgage lender has different rules for older borrowers. Some lenders will ask you to prove how you’ll maintain your payments once you’ve retired and some 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 likely to restrict its maximum age.
If you outlive the end of the mortgage term, you can pass on your house to loved ones as an inheritance.
Retirement Interest Only mortgages
Retirement Interest Only mortgages, RIOs for short, are available to homeowners aged 55 and over.
They are typically offered by building societies including Nationwide and Leeds Building Society as well as a host of small, regional societies.
RIOs come with many benefits for later life borrowers. As the name suggests, you only repay the interest every month and not the debt. This lowers the monthly cost.
Next, 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 are protecting the equity in your home. When the house is sold and the debt repaid, you can leave behind the equity as an inheritance.
You can use the money to boost your pension income, remortgage for extension works, or remortgage 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.
To qualify, 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.
Having no end date to the mortgage also means you could end up paying back a lot of interest.
Retirement Capital and Interest mortgages
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 an RCI deal 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.
Borrowers must be aged 55 and over. You’ll be able to borrow around 50% to 60% your property’s value. The debt should be fully repaid before you die which means you can pass on your home as an inheritance.
To take out a lifetime mortgage, you must also be aged 55 or over.
The most common type of equity release plan is like a mortgage. The amount you can borrow depends on the value of your home and the loan is secured against your property. It is also known as 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. You only pay interest on the part of the loan that you have withdrawn.
In ten years, the size of the lifetime mortgage market has grown from £789m to £4.8bn. As lifetime mortgages grow in popularity so to have the number of deals on offer, trebling in the last three years to 665 products.
Like RIOs, you don’t have to repay the mortgage debt until you die or move into long-term care.
The biggest difference, however, is the impact a lifetime mortgage can have on the equity in your property.
The interest is rolled up and added to the mortgage 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.
Each year your annual interest bill gets more expensive because it is calculated on a growing debt. This is known as compound interest.
It’s effects mean the size of your debt will snowball 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.
Lifetime mortgages are called equity release for a reason. They are designed to be taken out for life. If you want to repay it before you die you’ll be charged a penalty. Lots of new deals come with flexible features that allow overpayments or early repayments in certain circumstances. Check out your plan’s flexible features before signing on the line.
Equity release interest rates are higher than traditional and RIO mortgage rates.
The average equity release rate is 4.71%, according to finance experts Moneyfacts. The average rate for a RIO loan is 3.65%.
Equity release lenders, however, offer fixed rates for life. Great news for those taking out equity release when rates are low. Not so great when rates are high.
Later life mortgages are complex products so it’s important to get expert advice.
Speak to one of Tembo’s team of family mortgage specialists to find out which borrowing option is best suited to your unique set of circumstances.