Interest-Only Retirement Mortgages
04/06/2018
74
4 min read
Interest-only retirement mortgages are interest-only mortgages where you don't have to repay the principal of the loan until you die or move permanently into long term care.
The Financial Conduct Authority (FCA) (click to view the FCA's relevant legal instrument) gave its seal of approval for residential mortgages of this type in March 2018 and since then, many lenders have launched their own versions.
These mortgages fill a gap in the market regarding aged borrowers. With traditional mortgages, the loan term is fixed and lenders are less likely to grant a large fixed term to people approaching or at retirement age because of issues with repayment. In contrast, with retirement interest-only home loans, there is no fixed loan term.
They also may provide a solution to the many of those previously caught out being unable to repay the principle at the end of the term of an existing interest-only mortgage. Ironically, another interest-only mortgage might fix the fault of a previous such mortgage, however the key difference is the lack of fixed loan term.
This article examines retirement interest-only mortgages and considers:
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At what age can you take out a retirement interest-only mortgage?
The actual age you have to be to take up one of these products is not defined by the FCA and is purely down to the individual lender's definition. Many lenders specify that you have to be aged at least 55 (which is in line with the earliest retirement age of many private pension schemes) whereas for some lenders' products you'll have to be at least 70.
There is no indication that interest-only mortgages are set to be offered to any other age group; prospective residential mortgagees in England and Wales can only take out traditional repayment mortgages.
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What types of retirement interest-only mortgage are there?
There are broadly two main types; one being a retirement mortgage and the other being an interest roll-up lifetime mortgage.
For both types, your loan term isn't fixed; it goes on until you die or move permanently into long-term care.
| Retirement Mortgage | Interest roll-up lifetime mortgage | |
| How is loan paid back? | Capital is repaid from sale of your home | Capital and interest is 'rolled up' and repaid from sale of your home |
| Monthly Interest Repayments? | You have to make all your monthly interest repayments. Some lenders specify that after a certain time (or age you reach) you can choose to roll up the interest (i.e. no longer have to make monthly repayments) | None |
| Is your home at risk? | Yes, if you don't make your monthly interest repayments | No; you are effectively a protected tenant until you die or move permanently into care |
| How much can you borrow? | Sum is based on your retirement income and expenditure up to a specified maximum loan to value ratio | Sum is based on a loan to value ration determined by your age |
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How do retirement interest-only mortgages compare with traditional residential mortgages?
With traditional residential mortgages:
- Your loan term is fixed
- If you have an existing interest-only mortgage, you'd have been expected to set up a separate repayment vehicle to repay the capital
- You have to make all required monthly repayments until the mortgage term ends, otherwise your home is at risk
- Your maximum loan sum is based on your employment income and expenditure up to a maximum loan to value ratio
For both retirement mortgages and traditional mortgages, your home is at risk if you don't keep up repayments, although the repayment figures are calculated differently.
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What's the best way to find out which retirement interest-only mortgage is right for your needs?
At press time, retirement interest-only mortgage products were relatively new, with some significant lenders yet to launch their versions.
The new products are set to add to the more than 3,000 mortgage products presently on the market and as such are relatively untried.
It therefore is well worth considering using the services of an independent mortgage broker to help you choose which one best suits your needs.
Bear in mind the number of pensions presently on the market also; you need to choose a product which is in line with things like your retirement age and the individual stipulations of your pensions/s and what your sources of income might be after you take retirement.
As with all mortgage products, there are many trade-offs also. An interest roll-up lifetime mortgage-type product leaves you not having to make monthly repayments and means therefore that you can't be evicted under normal circumstances.
The flip side, however, is that interest rates are higher and there might be considerably less capital remaining to put towards your care (or to leave to your descendants) when your house is sold.
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