Retirement Interest Only Mortgages
If you have been considering Equity Release, you may have come across retirement interest only mortgages. These types of mortgage operate in similar ways to Equity Release however there are some key differences.
This article addresses the similarities and differences between retirement interest only mortgages and Equity Release. After reading, you should have a clear understanding of both products and an idea of which product suits you best. Let’s discover retirement interest only mortgages.
What is a Retirement Interest Only Mortgage?
As the name suggests, a retirement interest only mortgage is a mortgage aimed at the elderly. These products are interest only, but you will need to repay the capital when you pass away, require long term care, or sell the property. There are two main criteria to be eligible for a retirement interest only mortgage:
- Your property must be your main residence and meet the lender’s property requirements.
- You must prove you can afford the monthly interest payments.
Key Differences to an Equity Release Product
There are three main differences between a retirement interest only mortgage and Equity Release.
|Retirement Interest Only Mortgage||Equity Release|
|Total Cost of Mortgage||Generally cheaper||Generally more expensive|
Each difference affects borrowers in different ways.
No Minimum Age
For those younger than 55 looking to secure money against the equity they hold in the property, a retirement interest only mortgage is the only option (outside of a traditional mortgage).
For some this will be an advantage as making the monthly payments prevents the interest from rolling up and the total cost of the mortgage increasing. For others, this may be a big disadvantage if the monthly interest payments are not affordable in the long-run.
With a retirement interest only mortgage you are paying the interest portion of the loan each month. With Equity Release, the interest payments can roll up and are applied at the end of the loan. This makes the total cost of retirement interest only mortgages cheaper on the whole. However, it is worth noting that you can still make interest-only payments with Lifetime Mortgage Equity Release products at your discretion.
With Equity Release, most lenders abide by a no negative equity guarantee set out by the Equity Release Council. If you take a retirement interest only mortgage earlier in life or live for a long time, you may find the total cost of the mortgage is actually higher than Equity Release because of the total cost cap on most Equity Release products.
Who Can Get a Retirement Interest Only Mortgage?
In theory, anyone can get a retirement interest only mortgage but in practice they are aimed at older people. The younger you are when approaching a retirement interest only mortgage the higher the likelihood you will be paying interest over a longer period – which makes the product unattractive.
You will also need to show a lender long-term income such as a monthly income from a pension which most young people will not be able to provide. This is because pension pots mature over time and it is only later in life that you will have a general sense of how much retirement income you have.
Your property will also need to meet the lender’s requirements which normally means properties of standard construction. You may find that lenders decline an application due to the location of your property or if there are problematic restrictions on the property.
Finally, the property will need to be your main residence.
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How Do Repayments Work?
You will pay the interest on the loan each month as part of the RIO agreement. You will not need to pay the capital on the loan monthly.
The capital is repaid when you pass away or need long term care. Ordinarily this is done by selling the property, but lenders also allow your next of kin to settle the debt, either from your estate or from their own funds.
There is also the risk of repossession if you fail to keep up with your interest payments, something that is not a concern with Equity Release as there are no mandatory payments to make.
How Much Can I Borrow?
Lenders will look at your retirement income and decide how much they will extend as a loan. Because you must pass affordability calculations to show you can afford the monthly interest payment, the amount of loan offered is based on your ability to pay interest.
For example, if you cannot afford the interest on a £200,000 mortgage, a lender will offer a lower amount, even if your property is worth £500,000.
This is another difference to Equity Release and can result in you being able to borrow more or less with a retirement interest only mortgage depending on how much retirement income you have.
Retirement Interest Only Mortgage vs Equity Release
With Equity Release, the amount you can borrow is limited. Typically this is a cap of 50% of the property value although some lenders operate lower thresholds.
If you have the retirement income to afford interest payments, you may be able to borrow a much higher percentage of your property value.
Releasing equity from your home is beneficial for people who prefer not to have a mandatory monthly payment.
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Can I Remortgage?
Yes, remortgaging is possible. A remortgage operates in the same way as your original retirement interest only mortgage application and, in most cases, you will need to show you can pass affordability.
Remortgaging is normally to reduce the monthly interest payment cost which you should find is a straightforward process. If you are looking to borrow more, you will undoubtedly need to show a lender you can afford the higher loan.
Speak to a Specialist
Retirement interest only mortgages are a niche product that can be beneficial, especially if you are not keen on Equity Release. Both retirement interest only mortgages and Equity Release products are major financial decisions and you should always seek expert advice before committing to a product.
We provide free, no obligation advice on retirement interest only mortgages. Contact us to discuss retirement interest only mortgages today.