In recent years, there has been a notable rise in the popularity of retirement mortgages.
This trend can be attributed to several factors, including the increasing age at which people retire and the ever-rising property prices across the country. As people continue to work beyond the traditional retirement age, their financial needs and goals evolve.
This shift in borrowing trends reflects the changing demographics and economic realities of the UK, where retirement is no longer seen as the end of financial activity but rather a new phase with its own set of financial considerations.
Retirement mortgages come in various forms, making them a versatile option for those seeking financial flexibility in their later years.
Read on as we explain the different types of retirement mortgages and how they work.
What is a Retirement Mortgage?
There isn’t one “retirement mortgage”.
Think of it more as a collection of different mortgage types that are designed for people in their later life.
Typically, this would mean age 55 and older.
There are standard mortgage options available for borrowers who are currently under 65, but need a mortgage term that takes them beyond this age. This would be borrowing into retirement.
Then there are equity release based solutions, aimed at homeowners who are 55 or older. Often this would involve releasing equity, without moving home. This is borrowing in retirement.
But I’m not retired yet!
Don’t worry, you don’t need to be retired to take advantage of a “retirement mortgage”.
Types of Retirement Mortgages
When it comes to retirement mortgages, one size doesn’t fit all. There are several distinct types available, each catering to different financial situations and goals. Let’s explore the most common options:
Standard Mortgages
Contrary to popular belief, standard mortgages aren’t exclusive to younger borrowers.
If you plan to work past the traditional retirement age of 65, you may still be eligible for a standard mortgage.
These mortgages still come with fixed or variable interest rates and require regular repayments of both capital and interest over a set term.
The advantage of a standard mortgage is that you’ll eventually own your home outright, providing long-term security and potentially leaving a valuable asset for your beneficiaries.
However, it’s essential to ensure your income remains sufficient to cover the repayments throughout the mortgage term, even after you stop working.
Expect the lender to be asking questions about this and any pension income you are eligible for.
Retirement Interest-Only (RIO) Mortgages
Retirement Interest-Only (RIO) mortgages offer a more flexible approach for those in or approaching retirement.
With a RIO mortgage, you only make monthly payments to cover the interest, keeping the capital balance unchanged. This will significantly reduce your monthly outgoings compared to a standard repayment mortgage.
The outstanding loan is repaid upon your death or when you move into long-term care, often through the sale of the property.
This means you can enjoy the comfort and security of your home without the burden of hefty monthly repayments, but it’s essential to consider the impact on your estate and potential inheritance.
Affordability assessments will be needed to check that you can afford the monthly repayments, especially after age 65.
You will find more useful information in our article: What is a RIO mortgage?
Lifetime Mortgages (Equity Release)
Lifetime mortgages, also known as equity release, allow homeowners age 55 and over, to access a portion of the value tied up in their home without having to sell it.
This can provide a lump sum or regular income to supplement your retirement funds.
There are two main types of lifetime mortgages:
Lifetime Mortgage
You borrow a lump sum against the value of your home, and interest accrues over time. The loan is repaid upon your death or when you move into long-term care, usually through the sale of the property.
Home Reversion
You sell a share of your home to a plan provider in exchange for a lump sum or regular income. You continue to live in the property rent-free. The plan is repaid upon your death or when you move into long-term care, via sale of the property.
Accessing equity
It may have been a while since you last thought about a mortgage, so here’s a quick refresher about how equity and mortgages work.
What is equity?
Equity is the part of your home that you own outright. It is affected by any current mortgages or secured loans.
You calculate equity by deducting any secured debts from the value of your home.
Example without a mortgage
Property value £400,000, less outstanding mortgage of NIL = £400,000 equity.
Without any mortgage you own 100% of your home.
Example with a mortgage
Property value £400,000, less outstanding mortgage of £80,000 = £320,000 equity.
In this example there’s a mortgage debt of £80,000. Solutions are available for people with current mortgages.
Am I Eligible for Equity Release?
To be eligible for equity release in the UK, you generally need to be a homeowner aged 55 or over, your property must have a sufficient value (typically over £70,000), and it must meet certain conditions.
Eligibility
While retirement mortgages offer some valuable options, eligibility requirements will vary depending on the specific type of mortgage and the lender’s criteria.
Age Requirements
Standard Mortgages
Typically, lenders have a maximum age limit for the end of the mortgage term, often ranging from 75 to 85. This means you’ll need to ensure you can repay the mortgage before reaching that age.
Retirement Interest-Only (RIO) Mortgages
Most RIO mortgages have a minimum age requirement of 55, and some lenders may have higher minimums. There’s no maximum age at expiry.
Lifetime Mortgages (Equity Release)
The minimum age to apply for equity release is 55, with no maximum age limit. However, your age will influence the amount you can borrow, as older borrowers are offered larger sums.
Income and Affordability
Lenders need assurance that you can comfortably afford the mortgage repayments. For those borrowing in retirement, this assessment focuses on your pension income, savings, and investments.
Standard Mortgages
Lenders will assess your affordability based on your total income, including your earned income, pension, any other earnings, and potential investment income.
RIO Mortgages
The focus is on your ability to cover the monthly interest payments. Lenders will consider your earned income, pension income, savings, and other assets.
Lifetime Mortgages
Affordability checks are not required as there are no mandatory monthly repayments. However, lenders will still assess your financial situation to ensure the loan is suitable for your needs.
Property Considerations
The property you wish to mortgage plays an important role in eligibility.
Most lenders prefer well maintained, standard construction properties that are easy to value and resell if necessary. Flats, leasehold properties, and properties in certain locations may face additional scrutiny or restrictions.
As will homes built using non-standard methods, such as PRC concrete or steel-frames.
Credit History
While not the sole determining factor, a good credit history demonstrates responsible borrowing and increases your chances of approval.
For standard and RIO mortgages, lenders will conduct a credit check as part of the application process, so it’s wise to review your credit report beforehand and address any potential issues.
How to choose
It’s not easy to choose the right option for a retirement mortgage.
UK lender’s are continually adapting to how we work longer and need to borrow for longer.
There are RIO mortgages for when you can afford some repayments, and equity release for when you can’t.
There are also some RIO mortgages that change into a type of equity release plan at a later age.
The very best thing to do is seek advice from an experienced adviser. They will be able to assess your situation and listen to your plans, before researching the type of mortgage that suits you best.
Alternatives
There may be alternatives to a retirement mortgage but this will very much depend on your circumstances and you may find that other paths better suit your needs.
Downsizing
For some, the answer lies in downsizing – selling your current home and purchasing a smaller, more affordable property.
This will free up equity, providing a cash lump sum to bolster your retirement funds. Additionally, a smaller home should come with lower maintenance costs and council tax bills.
Older Persons Shared Ownership
The Older Persons Shared Ownership (OPSO) scheme offers an alternative route to homeownership for those aged 55 and over.
With OPSO, you buy a share of a property (between 10% and 75%) and pay rent on the remaining portion. This can be a more affordable way to get on the property ladder or move to a different home.
Joint Mortgages
If you have a younger relative, such as a child or grandchild, you could consider applying for a joint mortgage with them.
Or they could become a guarantor to your mortgage, giving you financial support.
Later Life Planning
Often the best plan is to take one mortgage option now, knowing that another will replace it at a later point.
A good example of this would be starting with a RIO mortgage and then transitioning to an equity release plan when the repayments become unaffordable.
The next steps
Our site has many guides and resources to help you to become more familiar with the mortgage options that are available. These are not intended to provide all of the answers, or to suggest which option is best.
For that you will need a mortgage adviser.
A mortgage adviser specialising in later life lending will be able to work with you to create a borrowing plan.
Depending on your age now, that could involve one type of mortgage or there may be a need to take out another (equity release) mortgage at a later date.
Not all advisers are able to help you with lifetime mortgages/equity release plans. This is because these specialist advisers need to have an additional, equity release based qualification. (which I have btw).
And all borrowers must receive financial advice before they are able to apply for an equity release plan.
To find out how Respect Mortgages can help you find the right adviser, please call us on 0330 030 5050.
The main types are standard mortgages, retirement interest-only (RIO) mortgages, and lifetime mortgages (equity release).
Typically, you need to be 55 or older, have sufficient income or equity in your property, and meet the lender’s criteria.
You pay only the interest each month, this helps to stop the debt getting any bigger. The loan is repaid when you die or move into care, usually through the sale of the property.
Read more: What is a RIO mortgage?
Yes, this is possible. This would be a similar process to a remortgage, where one lender takes over from another.
Read more: Can you get equity release if you still have a mortgage?
The two main types are lifetime mortgages (loan with rolling up interest) and home reversion plans (selling a share of your home).
You will find more useful information in our: Equity Release Guide
Standard mortgages typically have stricter age limits and may not be designed for retirement income sources.
This depends on the lender, as they are free to set their own rules. Some need the loan repaid by age 80/85. Others the maximum age is 95 and a few have no maximum.
There’s no maximum age for lifetime mortgages.
Yes this is possible. You need to pass the mortgage affordability tests. Your income can include pension income and any other part time work.
The most popular type of equity release is a lifetime mortgage. You borrow against the equity in your home. This is based on your age, so the older you are, the more you can borrow.
There’s no monthly repayments to worry about. The debt is repaid when you die.
Read more: How Does Equity Release Work?
Gone are the days when we all stop work at age 60 or 65 and ‘retire’.
For many different reasons, people retire at different ages, and some continue to work. A lender will assess a mortgage application differently when the mortgage terms takes you beyond age 65.
This is borrowing into retirement. You don’t need to be retired though, it’s just that the products and financial assessments change at this age.
You will find more useful information in our: Borrowing into retirement guide
We can help you find a whole-of-market equity release specialist.
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