In your sixties and need a mortgage? Finding it difficult to get a loan? You might find a retirement interest-only mortgage is a suitable option. We explain how they work.
Over-65 years old and looking for a mortgage? It can be more difficult to get one when you are older as the banks assume you will not be working and therefore unable to pay it off. Customers in need of mortgage finance may find that the banks they have been loyal customers of for decades turn them away or will only lend them a small sum.
However, lenders are increasingly realising that - as customers live longer and many continue to work into their seventies - they may need mortgage finance. That’s where a retirement interest-only mortgage could be the right fit.
More mortgage lenders are launching these products as they realise that the over 65s market requires something different for their needs.
Why you might need a mortgage in later life
Often retirees can find that they need to purchase a property that is more suitable for their needs, such as a bungalow or somewhere nearer local facilities. They might also want to release funds from their home for home improvements or to gift to family members for university fees or to help them get on the property ladder. Remember, however, that if you gift money from you estate to beneficiaries they could have to pay inheritance tax on the money.
Paying off an existing interest-only mortgage
Another issue for those in or nearing retirement can be pre-existing interest-only mortgages, which are nearing maturity and need to be paid off. Many of these were taken out before the credit crunch with no repayment vehicle in place, or one that may not have made enough money to pay off the loan. The difficulty is that mortgage lenders are often unwilling to provide older borrowers with conventional residential mortgages, so one option may be to pay off the existing loan with a retirement interest-only loan.
How does a retirement interest-only mortgage work?
A retirement interest-only mortgage is secured on the value of your property. As with other interest-only mortgages, you only pay the interest on the loan each month. Similar to a lifetime or equity release loan, the mortgage is paid back when your property is sold after you enter long-term care or the last remaining borrower dies.
Will I be eligible?
These products are specifically designed for older borrowers, so you have to be aged over 55 to be eligible. Lenders will take into consideration your current age and how old you will be when the mortgage matures. And while many banks are becoming more comfortable about lending to older borrowers, there will still be an upper age limit to lending – often 70.
It’s best to consult a specialist mortgage advisor as many of these loans are only available through them and they will help you decide if it’s the best option for you.
What about the paperwork?
This depends on the individual lender. If you are 10-years away from retirement, lenders are likely to use your current salary details to determine affordability, however they may also wish to see evidence of your pension planning. If you are closer to retirement, you may have to provide a pension forecast from your employer, an annuity statement and details of your state pension provision.
In terms of affordability, you may only have to prove that you can afford to pay the interest each month.
Can I make repayments?
While you only need pay the interest on retirement interest-only mortgages, there are often repayment options available and the ability to pay off the mortgage over a certain number of years if you wish to. Usually you can make regular overpayments, within certain limits laid down by the lender. However, if you pay the loan back early you could incur a redemption penalty.
Can I still move home?
You can also still move home if you wish to and you can also secure another loan against your property at a later date should you need to.
Will a retirement interest-free mortgage reduce the equity in my property?
Unlike a lifetime or equity release mortgage, retirement interest-only mortgages do not significantly reduce the amount of equity remaining in your home. Taking out one could affect you eligibility to receive certain mean-tested benefits, however.
Always think carefully and take specialist advice before securing a loan on your home.
Written by Piper Terrett, Fluent Money Group