If you’re contemplating taking out a mortgage as a retired person, there’s good news. There is a wide range of lenders who offer specific interest-only mortgages aimed at people aged 55+, 60+ and 65+.
These products are known as retirement interest-only mortgages (RIOs) and they are designed to enable retirees to remortgage their existing interest-only mortgages or release some equity from their home.
This guide will walk you through the key considerations with RIOs ut if you want tailored, independent advice then we invite you to contact Think Plutus.
Our impartial advisers will help you ascertain whether this is the right option for you and help you find the best deal from the full market of providers. Make an enquiry today to get started.
What is a retirement interest-only mortgage?
Specialist interest-only mortgages for over 55s are not unlike standard interest-only mortgages. You make regular payments that cover the interest. The key difference is that no end date is determined upfront.
The loan capital is repaid once the mortgage holder moves into permanent residential care, sells their house or passes away. The full debt repayment is taken from the proceeds of selling the property.
Some lenders will need applicants to show evidence that they meet a minimum income threshold to be eligible for a loan. Others assess prospective borrowers on their ability to keep up with interest payments. Different mortgage types are offered by different lenders at a range of interest rates, so there is lots to consider.
Are there age restrictions involved?
Age restrictions are imposed by some lenders, but many providers of interest-only mortgages are happy with a minimum age of 55 and no maximum age for applicants. Loan-to-value ratios, pension income and term length are other variables that different lenders approach in different ways.
In some cases, it is necessary to have a lasting power of attorney (LPA) in place to meet the eligibility criteria for this mortgage type. Please note this is called a continuing power of attorney in Scotland.
Let’s take a look at some specific age brackets:
If you meet the criteria for eligibility with a lender, you should be able to apply for this mortgage type if you’re aged 55+. Lenders approach interest-only mortgages for over 55s in various ways but, generally speaking, there are many similarities between the rates, policies and criteria.
There are many providers who offer loans to eligible borrowers over 55 of between £30,000 and £500,000. Some lenders will offer above and below these amounts, but it is a pretty standard range. The rates will depend on factors like the amount you are borrowing, your age, the length of the term, your credit score and other personal factors.
There are providers of retirement interest-only mortgages whose minimum age requirement is 60 rather than 55. Your pension statement will serve as your evidence of income and some lenders will stipulate a minimum income level from your pension.
Some lenders even stipulate 65 a the minimum age, though the majority will offer loans to younger people than this. Think Plutus can help you go over all the interest-only mortgage options aimed at over 65s to ensure you pick the right lender and the best deal.
If you’re over 70, you can still get a retirement interest-only mortgage. Some lenders will have maximum age limits, and there are even some who only offer these loans to people aged 70-75, 70-80 or 70-85. If you will be making interest payments going into these stages of life, it’s important to prepare evidence of your pension income.
Be advised that some lenders will require mortgage loans to be paid back by a certain age. However, most lenders allow the repayment to be made once the holder dies.
How much will I be able to borrow?
This really depends on the lender that you go with. For example, some lenders will offer up to 50% of the value of a property, capped at £500,000. Others will offer up to 55% loan to value with a maximum loan of £1,250,000. You will also find that some lenders have a minimum property value on which they will loan, bottoming out at around £60,000.
Can retirement interest-only mortgages be repaid early?
This is another one that depends entirely on the lender. A number of providers will permit borrowers to overpay retirement interest-only mortgages by up to 10% per year on fixed-rate mortgages without penalty. On standard rate loans, borrowers are sometimes permitted to overpay by as much as they like. Some lenders will charge an early repayment fee on any overpayment that exceeds 10% of the loan.
If you go with a building society or a challenger bank, you may be able to overpay as much as you like without incurring any early repayment penalty. The important thing is to read and understand the terms and conditions for a product before you commit to it.
What are the pros and cons of retirement interest-only mortgages?
When you take out any kind of loan, you should evaluate your options to decide which is right for your needs. Take time to consider this carefully by referring to the advantages and disadvantages of retirement interest-only loans.
- The amount of the loan remains stable if you keep up with your interest payments.
- You can release equity that locked up in your property.
- Over-payments are permitted on loan amounts to reduce the outstanding debt.
- Good possibility of leaving an inheritance for children and grandchildren.
- Not affected by compound interest.
- Monthly payments are usually less than with standard repayment mortgages and almost always cheaper than lifetime mortgages.
- With interest-only payments, you can minimise your outgoings to ensure your other financial commitments are not jeopardised.
- Avoid downsizing without bringing financial pressure onto yourself, whilst maintaining the flexibility to downsize in the future.
- Can be helpful if you have an existing interest-only mortgage.and have been unable to remortgage with another lender.
- You must pass affordability checks or prove that your minimum annual income meets the criteria.
- If you have unstable or less secure income, or your property meets the minimum value requirements, this option will not be suitable for you. Some lenders have restrictions on the types of income they will consider.
- Ultimately, your home will have to be sold in order to repay the loan.
- Interest rates can be higher than you get with most standard repayment mortgages.
- If you choose a standard variable rate deal, your monthly payments could rise in line with national interest rates.
There are brokers who lack the knowledge and experience to arrange interest-only products. This has led to concerns of an ‘advice gap’ that could lead to some customers being directed towards products that are not a good fit for their needs. Only go with brokers who have the necessary ability to advise on interest-only products rather than just equity release schemes.
What impact does an interest-only mortgage have on inheritance?
As stated, the fact that borrowers are often permitted to overpay on their interest payments schedules means you could reduce or even clear the debt before the property is sold.
Looking at it from a different perspective, releasing equity from your property can enable homeowners to pass on an early inheritance. Without rolled-up interest charges on the loan, it would ultimately mean that there would be more left over to leave to your dependents than you would get with a lifetime mortgage.
If you have any doubts or questions, speak to Think Plutus and we’ll talk about it with you in more detail.
Will my interest-only mortgage application be undermined by bad credit?
None of the three credit reference agencies lenders use to underwrite applications (Experian, Equifax and CallCredit) hold financial history for longer than 6 years. This means customers who once had a poor credit history but have since kept up with payments on loans and credit cards could still qualify for a retirement interest-only mortgage. Obviously, there will need to be evidence that you can keep up with the interest payments.
Let’s say, for example, you’re aged 65 and have a satisfied CCJ with no other adverse credit issues. You wish to apply for a retirement interest-only mortgage. The CCJ may not immediately make lenders rule you out, provided you can give a satisfactory explanation for the CCJ and proof that it is no longer in effect.
Bear in mind that with financial bad credit issues that you have incurred within the last 6 years, you may need to consider a different type of finance, such as equity release.
What if I already have an interest-only mortgage?
One group of people that is most likely to benefit from a retirement interest-only policy is anyone with an existing interest-only deal. This is particularly true if you are approaching the end of your term.
According to research from the Financial Conduct Authority (FCA), there were 1.67 million outstanding interest-only mortgages (representing 17.6% of all outstanding mortgage accounts) in the United Kingdom, and no fewer than 1 in 9 of those customers were aged 65+. The financial watchdog concluded that, under existing EU mortgage rules which have all but outlawed interest-only retirement lending all over Europe), many thousands of elderly, financially vulnerable customers have been left without the means to pay those debts.
The issues included disqualifying pensioners from selling their homes or moving into full-time care in order to pay off outstanding loans. Customers were prohibited from pursuing the option of interest-only retirement mortgages, even when they had up-to-date payment records and/or the financial means to keep up with monthly payments.
Following this review, the FCA relaxed its rules from March 2018. This means that customers who are stuck in an existing interest-only mortgage to remortgage to a retirement interest-only mortgage with another lender. This can be a much-needed lifeline but, of course, it depends on customers being able to meet the necessary income and property value requirements.
Speak to a retirement interest-only mortgage expert
If you think a retirement interest-only mortgage could be right for you, it’s important to speak to an expert to get the right advice for your circumstances. Think Plutus has all the knowledge and experience to help you make the right decision for you, so please don’t hesitate to get in touch and arrange a free, no-obligation consultation. Our expert advisers will offer you valuable advice and help you find the right deal for your needs if this is the best option for you.
For retirement interest-only mortgage advice you can rely on, Think Plutus.