Retirement Interest-Only

What is a retirement interest-only mortgage?

A retirement interest-only mortgage is similar to a standard interest-only mortgage in that you only pay the interest due on your loan each month and you don’t repay any of the capital. The loan is secured against your property so you only need to prove your affordability for the interest payments, making it much easier to pass the lender’s criteria.

As you only pay the interest, this type of mortgage is much cheaper than a repayment mortgage, offering you more financial freedom in your retirement. The interest rate is fixed so you pay the same amount each month. This gives you peace of mind that you won’t have any fluctuations in your payments.

Specifically designed for older borrowers, lenders don’t tend to have age restrictions for retirement interest-only mortgages and there’s no end date, which you would normally have with a mortgage term. Instead, the difference from a standard interest-only mortgage is that the loan is usually repaid when the property is sold after you either go into long-term care or die. This gives you the security of being able to have a mortgage without worrying about having to repay it in a specified time frame.

The lower monthly payments for this type of interest-only mortgage provide you with more flexibility with your finances during retirement. However, bear in mind that having to repay the loan from the proceeds of the sale of your property will reduce any inheritance left to your loved ones.

How does a retirement interest-only mortgage work?

Each month, you pay the interest due on the loan, with the loan being repaid when you either move into long-term care or die. If you take out a retirement interest-only mortgage with someone else, the loan is only repaid when the last borrower goes into long-term care or dies. That way, neither of you has to worry about the security of your home or having to repay the outstanding debt.

An example is that your property has a value of £300,000. You and your partner want a retirement interest-only mortgage to borrow 25%, equalling £75,000, at an interest rate of 5%. In 15 years’ time, you both have to go into long-term care and your property has to be sold to repay the loan. As you’ve only repaid the interest since you took out the mortgage, the amount of £75,000 is still outstanding. Since you applied for the mortgage, however, your property’s value has increased to £400,000. This means that, once the £75,000 loan has been repaid, an amount of £325,000 is left from the sale proceeds.

Some lenders allow you to make capital repayments on a retirement interest-only mortgage without being penalised. This will reduce the loan amount to be repaid when you either pass away or go into long-term care. Therefore, if you’re in a position to do this, it will increase the amount of inheritance you leave to your loved ones.

Why might you need a retirement interest-only mortgage?

There are many reasons why a retirement interest-only mortgage can be appealing. Not least of which is that, as an older borrower, you may be finding it difficult to be approved for a standard residential mortgage or remortgage. This type of mortgage has easier criteria to meet and lets you benefit from lower monthly payments. As well as that, you can stay in your home without the worry of how to repay the loan hanging over your head. A retirement interest-only mortgage can also be beneficial for the following reasons.

You cannot repay your current interest-only mortgage

You may already have an interest-only mortgage but can’t afford to repay the loan at the end of the term as per your original repayment plan. With a retirement interest-only mortgage, you only need to make the monthly interest payments. The mortgage loan won’t have to be repaid until you either go into long-term care or die.

You want to use some of the equity that’s built up in your home

You may to release some of your home’s equity but are struggling to be approved for a remortgage because of your age. For example, you may want to carry out home improvements, pay off some debts, help a family member get onto the property ladder or enjoy a better lifestyle during your retirement.

You want to reduce the size of your estate for estate planning purposes

Inheritance tax is payable on your estate if it’s over a certain value. Using a retirement interest-only mortgage, you can use some of your home’s equity to gift some money to your loved ones. Not only does this give you the chance to see your loved ones benefit from the financial gifts while you’re still alive but it reduces the size of your estate for tax purposes. This, in turn, reduces the amount of inheritance tax that’s payable.

Do you qualify for a retirement interest-only mortgage?

Lenders’ criteria vary but retirement interest-only mortgages are typically offered to borrowers aged 55 or over. You usually need a minimum amount of equity in your home, such as 50%, although some lenders offer this type of mortgage without an equity minimum. Some lenders set minimum loan amounts and others offer set loan-to-value (LTV) ratios, such as 55% or 60%.

You need to pass the lender’s affordability checks to show that you can comfortably afford the monthly interest payments on top of your normal outgoings. This includes providing details of your employed or self-employed income if you’re still working at the time of application as well as details of your income into retirement, such as your pension income and any other financial entitlements. If you’re taking out the mortgage with another person, you have to prove that you can cover the monthly payments on your own should they go into long-term care or pass away before you do.

How much can you borrow with a retirement interest-only mortgage?

The amount you can borrow depends on various factors. These include the value of your home, the loan-to-value ratio and your affordability for the mortgage. The lender will check your income – including your employed or self-employed income if you’re still working and your income into retirement – as well as your outgoings and outstanding debts. This ensures that you can comfortably afford the mortgage while you’re working as well as after you’ve retired.

It’s unlikely that you’ll be able to borrow as much with an interest-only mortgage as you would with a repayment mortgage. This is because interest-only mortgages increase the risk for lenders. For example, you may be restricted to a 50% LTV with a retirement interest-only mortgage as opposed to a 65% LTV with a repayment mortgage.

How do you repay a retirement interest-only mortgage?

There are two repayment aspects for a retirement interest-only mortgage. One is the interest that’s due on the loan amount, which you pay monthly. The other aspect is the capital borrowed. With this type of mortgage, there isn’t a fixed term to repay the loan. This means that it doesn’t have to be repaid until the property is sold, which is usually after you either move into long-term care or die. Some lenders allow capital repayments to be made so it’s worth checking your lender’s terms when arranging your retirement interest-only mortgage. If your finances allow for this, it’s a good way to reduce the balance of the loan owed.

The benefits of a retirement interest-only mortgage

There are various advantages to having a retirement interest-only mortgage:

• You can stay in your home without the worry of having to repay your mortgage loan each month and by a certain date as there’s no fixed term.
• If you take out the mortgage with someone else, the property isn’t sold to repay the loan until the last one of you either goes into long-term care or dies.
• Only the interest due on the loan needs to be paid each month, making this much cheaper than a repayment mortgage.
• The affordability criteria are easier to meet as you only need to show that you can cover the interest payments each month.
• The interest rate is fixed so you know exactly what you need to pay on a monthly basis.
• You can use a retirement interest-only mortgage to release some of the equity in your home.
• You may be able to make occasional capital repayments, depending on your lender’s terms. This would reduce the overall loan balance owed.
• The interest isn’t rolled up so you don’t need to worry about it accumulating.
• As there’s no compounded interest to be repaid, there will be more to leave to your loved ones.
• If you currently have an interest-only mortgage, you can switch to a retirement interest-only mortgage. This is a good option if you know you’re going to struggle to repay the loan at the end of the term or don’t want to downsize.
• You don’t have to be retired to apply for this type of mortgage.
• This type of mortgage is usually cheaper than a lifetime mortgage.

The drawbacks of a retirement interest-only mortgage

There are also disadvantages to consider before applying for a retirement interest-only mortgage:

• You have to pass the lender’s affordability checks, proving that you can comfortably afford the monthly interest payments when you’re retired. If you’re taking out the mortgage with someone else, you must be able to cover the payments on your own if they go into long-term care or die before you.
• A minimum equity amount in your home, such as 50%, is usually required to be approved for a retirement interest-only mortgage.
• You need to make monthly interest payments. If you’re unable to make these interest repayments, you risk your home being repossessed by the lender.
• As it’s an interest-only mortgage, none of the capital is repaid when you make your monthly payments. This means that the entire loan is outstanding and has to be repaid when you move out of your home and into long-term care or pass away.
• If you choose to repay your mortgage early or make higher overpayments than are allowed under your lender’s terms, you may be penalised with an early repayment charge.
• If you receive Pension Credit or any other means-tested benefits, they may be affected if you take out a retirement interest-only mortgage.
• When you either go into long-term care or die, your home will have to be sold to repay the mortgage loan. This means that you won’t be able to leave your home to your loved ones and the amount of inheritance they receive will be reduced.

The costs involved with a retirement interest-only mortgage

There are various costs to budget for on top of the monthly interest payments when applying for a retirement interest-only mortgage. These vary between lenders but can include an arrangement fee, a booking fee and valuation and survey fees. You’ll also need to pay the legal costs for the transaction. Some lenders also charge an early repayment charge if you either switch to a new deal before the tie-in period of your current deal has ended, repay your mortgage early or make overpayments that are higher than those allowed under your lender’s terms. Our mortgage brokers will compare the retirement interest-only mortgage deals and the fees charged for each. That way, you can choose the one that’s best suited to your needs.

Applying for a retirement interest-only mortgage

Whether you’re already retired or are approaching retirement, a retirement interest-only mortgage offers a flexible way for you to borrow later in life. Our mortgage brokers – based throughout Kent, London and Edinburgh – will discuss this type of mortgage with you in detail as well as your circumstances. They will ascertain how much you can borrow and compare the retirement interest-only mortgage deals for you. Once you’ve chosen the deal that’s right for you, your dedicated mortgage broker will submit your application. They will oversee the mortgage process to ensure that it runs smoothly from start to finish.

To get started, just give us a call on 01322 907 000 and get expert, impartial advice on retirement interest-only mortgages. If you prefer, send an email to us at info@trinityfinance.co.uk or an enquiry via our contact form. One of our mortgage specialists will reply to you as quickly as possible with more information.

Should you choose a retirement interest-only mortgage?

Whether or not a retirement interest-only mortgage is right for you depends on your circumstances and financial needs. It provides an alternative way of borrowing if you’re struggling to secure a standard residential mortgage because of your age. It offers a solution if you already have an interest-only mortgage but know you’re going to struggle to repay the loan at the end of the term or don’t want to downsize. You can use it to unlock some of the equity in your home. It’s a good way to reduce your monthly mortgage payments. It gives you peace of mind that you can stay in your home without having to worry about repaying the loan by a specific date.

To discuss it further, just give us a call on 01322 907 000. Our mortgage brokers are here to help you make the best financial decision for your needs. They can advise you on retirement interest-only mortgages as well as the alternatives available. That way, you can make an informed decision about borrowing into retirement.