If you’re retired or are approaching retirement, there are specific later life lending products for you to take advantage of. Two of these are lifetime mortgages and retirement interest-only mortgages. They both have similarities, such as allowing you to access the equity tied up in your home and not having a fixed repayment term, but they also have key differences too. Here, we’ll explain what each of these mortgage types entails so that you can make the best decision when borrowing into retirement.
What is a retirement interest-only mortgage?
Typically available for borrowers aged 55 or over, a retirement interest-only mortgage is a residential mortgage that’s secured against your home. Just like a standard interest-only mortgage, you only pay the interest that’s due each month. This makes it cheaper than having a repayment mortgage.
The difference from the standard type is that there’s no fixed term to repay the loan. Instead, the loan is usually repaid when your property is sold after you either move into long-term care or die. This makes the affordability checks much easier to pass as you only have to prove that you can cover the monthly interest payments. Not only that, but you have the security of being able to stay in your home for the rest of your life without worrying about how or when to repay the loan. If you take out a joint retirement interest-only mortgage, the loan isn’t repaid until the last surviving borrower goes into long-term care or passes away.
Use it to repay your current interest-only mortgage
This type of mortgage is a good option if you already have a standard interest-only mortgage and are nearing the end of the term but know that you’re going to struggle to afford to repay the loan. If you don’t have adequate savings and aren’t ready to downsize, you can simply remortgage to a retirement interest-only mortgage. Your original mortgage will be repaid and you’ll have peace of mind that your new mortgage won’t have a fixed term.
Release some of your home’s equity
You can also use a retirement interest-only mortgage to release some of the equity that’s tied up in your home. As an older borrower, it can be difficult to remortgage due to lenders’ age restrictions so this offers an ideal solution. You can then enjoy a more comfortable lifestyle during your retirement, carry out some home improvements, help a family member get onto the property or clear some debts, for example.
Mitigate your inheritance tax liability
You can also release some of your home’s equity to gift money to your loved ones. This reduces the size of your estate and, in turn, the amount that’s subject to inheritance tax. Aside from tax purposes, gifting money to your loved ones allows you to see them benefit from this while you’re still alive.
What is a lifetime mortgage?
A lifetime mortgage is a type of equity release product available for borrowers aged 55 or over. You can release some of the equity that’s tied up in your home and either receive a tax-free lump sum or smaller sums as and when you need them. You retain ownership of your home and the mortgage is secured against it.
Just like a retirement interest-only mortgage, there’s no fixed term for a lifetime mortgage so the loan doesn’t have to be repaid until you, or the last surviving borrower, move into long-term care or die. Interest is charged on the loan but, unlike a retirement interest-only mortgage, it’s usually rolled up. This means that the interest is added to the loan amount to be repaid at the same time, rather than you having to make monthly payments.
This gives you more financial freedom during your retirement, which is beneficial when you’re on a limited income. However, compound interest makes your overall debt increase quickly. As such, it’s a more expensive option in the long run compared with a retirement interest-only mortgage. It also reduces the amount of inheritance you can leave to your loved ones.
You can choose an interest-paying lifetime mortgage if you prefer. With this option, you can either make full or partial interest payments. Either of these options reduces the total amount to be repaid at the end as well as the overall cost of the mortgage compared with the interest roll-up option.
Your home’s value
If you choose the interest roll-up option, the larger outstanding debt considerably reduces the amount that can be passed on to your beneficiaries once your home has been sold to repay the debt. However, you can ring-fence some of your home’s value to ensure that this amount is left as an inheritance for your loved ones.
Another concern with compound interest is the risk of negative equity, which is when the amount owed is higher than your home’s value. To avoid this scenario, make sure that a no negative equity guarantee is included when taking out a lifetime mortgage. This ensures that your estate won’t have to be used to repay the balance of the debt after your home is sold.
Also, just like releasing equity with a retirement interest-only mortgage, having a lifetime mortgage is a good way to reduce your estate’s value for the purpose of inheritance tax planning.
A lifetime mortgage vs retirement interest-only mortgage
Whether a lifetime mortgage or retirement interest-only mortgage is best for you depends on your circumstances. Think about what you want the mortgage for, how much you want to borrow, the value of your home and your financial position. Consider the costs involved and the impact on any inheritance that will be left to your loved ones. As a later life mortgage can directly affect your family, it’s a good idea to discuss these two types with them and weigh up your options.
Our mortgage specialists are here to help you decide on the best plan of action when it comes to borrowing in later life. They’ll give you detailed advice on a lifetime mortgage vs retirement interest-only mortgage and discuss your circumstances to ascertain which is more suitable for you. Simply give us a call on 01322 907 000 for impartial advice and comparisons on these later life mortgages.