The range of mortgage products available to older borrowers has undergone a revolution in recent years. There are now several ‘later life’ mortgage products, specifically aimed at customers over 55, such as retirement interest-only mortgages and equity release loans.
What’s caused this boom in later life mortgage products? And what does this mean for those hoping to secure a mortgage after a certain age?
- Why lifetime mortgages are popular
- Reasons to get a mortgage after 55
- What is a retirement interest-only mortgage?
- RIO versus equity release
According to Richard Norrington, CEO of Ipswich Building Society, “the perceptions of having a mortgage later in life are changing.”
In the past, achieving ‘mortgage-free status’ was a milestone for most homeowners. However, the number of people now making a decision to take out a mortgage product later on in life has risen. Naturally, the mortgage market has reacted to demand.
Norrington says: “It was just a couple of years ago that many providers were reluctant to lend to older borrowers and now they are actively trying to attract this type of customer.
“In particular, allowing pension income to be used for mortgage payments has been a real game changer.”
As one in three people approach retirement still in debt, there’s another reason mortgages in later life are increasingly popular. Remortgaging with an over-55 mortgage means many can pay off their debts without dipping into their pension pot. It releases them from a debt-laden retirement – and equity release mortgages can mean you don’t have to pay back a penny. Instead, your house is sold when you die and the mortgage lender receives the repayment from the proceeds.
One further reason people opt for a later life mortgage is to downsize – so they can rent out their larger home for a pension income.
Research by Ipswich Building Society reveals that 37% of homeowners and prospective homeowners expect to have a mortgage after 50 due to reasons other than not having reached the end of their term.
The top reasons given by respondents were:
To cover living expenses
15% of respondents believed that they would need to hold a mortgage to cover living expenses. It’s important to bear in mind that those looking to borrow on this basis will be limited in their choice of providers willing to lend.
Freeing up funds to spend on holidays
Retirement can often be a perfect time to take those trips that weren’t possible whilst juggling work and family commitments.
To invest in a new property
Remortgaging can free up the cash needed to downsize to a more manageable property. Many may release cash to move from the city to the countryside for a more relaxed lifestyle.
When extending or making changes to current home
Many add value to their properties through an extension or renovation project. People might make their home ‘future-proof’ by adding in a downstairs bathroom, improving accessibility.
Changes in employment status/career
Cash could be freed up to turn a hobby into a source of income, or explore a new career path.
To give inheritance to children/grandchildren
Couples buying for the first time in the UK need to save for nearly five years for a 15% deposit. This rises to 15 years in London. Remortgaging to release capital from your own property could be a convenient way of helping younger relatives get onto the property ladder sooner.
To cover the expense of looking after parents in old age
With an ageing population, many over-50s are finding themselves funding both younger dependants and care for elderly relatives.
Retirement interest-only (RIO) mortgages are available to older applicants who wish to release some of the equity tied up in their property. To benefit, you must be able to make monthly interest payments on the loan.
Requirements vary between providers. Generally speaking, applicants must meet the following criteria:
- Over 55 (some providers have high entry ages)
- Have a sufficient monthly income (i.e. from pensions or property lets) in order to make the monthly interest repayments
Historically, the range of mortgage options for those over 50 was minimal. However, lenders realise that older borrowers are asset rich but cash poor. Releasing cash from property lets them enjoy their retirement. As a result, mortgage lenders are enhancing their variety of later life products to meet their needs.
In spring 2018, the Financial Conduct Authority (FCA) changed the categorisation of RIO mortgages. Whereas previously RIO mortgages sat with ‘equity release’ products, they have now been reclassified as standard mortgage options.
Equity release products can only be sold by qualified professionals. The same rule also applied to RIO mortgages. However, RIO products can now be sold by regular mortgage brokers and lenders, making them more accessible.
The main similarity between RIO and equity release is that both products require full repayment once the mortgage-owner passes away or moves into long-term residential care.
However, there are some crucial differences between equity release products and the RIO alternative:
Applicants for RIO mortgages have to pass affordability checks and make on-going monthly interest payments. Equity release customers don’t – and can opt to have interest accrued and added to the final repayment, meaning no monthly repayments at all.
A RIO mortgage is cheaper to arrange – but could end up costing more in the long-term. Equity release mortgages are more expensive, but provide long-term cash flow affordability as you don’t have to make regular repayments.
Negative equity and inheritance guarantees
A RIO mortgage doesn’t always come with a no-negative equity guarantee. When you die and your house is sold, if the outstanding amount due is greater than the sale proceeds, your family won’t see a penny. They won’t owe any extra, but you won’t leave them an inheritance.
An equity release mortgage lets you choose to protect part of your property for inheritance. It means you’ll have less money available in your loan, but does ensure your family receive some inheritance from the sale of your property.
A retirement interest-only mortgage is like any other: if you don’t keep up monthly repayments, your home could be repossessed.
Equity release mortgages, however, agree you can live in your home the rest of your life – or until you go into long-term care. If your spouse outlives you, they can also stay in the property until they die, too. You won’t be forced out of your home.
Usually customers on an equity release mortgage are not able to switch to another mortgage for several years after origination, or until an introductory period ends. However, RIO mortgages provide customers with the flexibility to switch to a new product or new provider.
Building societies were certainly the main drive behind the rise in RIO mortgage products. However, it could soon become a regular offering among larger high street lenders too. Nationwide was the first high street lender to expand its later life mortgage offering to include RIO, repayment, and equity release products. It may only be a matter of time before larger banks follow suit.
The sudden influx of available mortgage products may leave older borrowers feeling spoiled for choice. It’s important to consider your options carefully before making any permanent arrangements.
Richard Norrington warns: “With these changes comes the challenge of ensuring that later life borrowers are selecting the most suitable mortgage product for their individual circumstances.
“Standard residential mortgages, RIO, and equity release all have their various merits. It’s important to seek professional advice before committing to any type of loan secured against your property.”