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Money & Rights

Find a later-life mortgage

Most of us probably don’t set out with the aim of still having a mortgage in our 70s or 80s, but these days it’s much more common than you think. Sue Hayward reports

Many lenders are coming up with specialised mortgage products and extending, or wiping out, any upper age limit, which could mean more homeowners making repayments from their pension pot. This could sound like irresponsible lending, but some mortgage deals actually offer a financially viable alternative to the somewhat expensive and inflexible equity release schemes, if you need to borrow some extra cash.

Extra costs

As with most mortgage products, there are often ‘arrangement’ or set-up fees to pay, especially with fixed deals. With Later Life Lending options these range from around £200 with the Bath building society up to £1000 with the Leeds, depending on the product you choose.

It’s worth checking the rules on overpayment, too, as if you decide you’re able to repay some of the outstanding loan early some lenders like the Marsden Building Society will only allow a five per cent overpayment annually, while others like Ipswich let you overpay by up to 50 per cent.

You can find out more about your options and the costs involved with helpful guides from the Money Advice Service, website: www.money adviceservice.org.uk)

Paying a mortgage with a pension

It’s unlikely you’ll be looking to take on your first mortgage in your 70s but you may want to increase your existing loan or extend your mortgage term for a variety of reasons.

Some homeowners may have found themselves caught in the ‘interest only’ trap where they’re nearing the end of their mortgage term, but with no means of repaying the original loan. Or it could be you want to remortgage to fund some home improvements.

How have the rules changed?

Mortgage lending got a lot tighter after the financial crash of 2007, with ‘interest only’ loans practically wiped out. Lenders looked for the ‘affordability’ factor, rather than just basing a decision on standard income multiples when giving mortgage loans.

However, lending rules are now being relaxed, especially for older borrowers, with many lenders increasing or removing any ‘upper age limit’.

Rewind five years and there weren’t any mortgage deals available to borrowers who would still be paying off a mortgage in their 80s, according to the financial comparison site Moneyfacts. Yet now there are more than 1000 products on the market, under the ‘Later Life Lending’ banner, that are available to people wanting to borrow money in later life.

On a practical basis it can make sense: we’re living longer and in many cases working past retirement age, which means there may be both a need to borrow, along with the means to support a mortgage in later life.

The rise of the ‘Retirement Interest Only’ (RIO) mortgage

Since the Financial Conduct Authority gave the green light to this type of lending in March last year, there are now 12 lenders, including building societies such as the Leeds, Newbury, Nottingham, Bath, Buckinghamshire and Saffron, offering a total of 38 products.

Originally counted under the ‘equity release’ umbrella, these products are similar to a traditional ‘interest only’ mortgage, but come with a couple of big differences

In most cases you only need prove you’re able to make the monthly interest payments, as the original loan is usually repaid when you downsize, or your home is sold when you die or go into long-term care. And in most cases loan terms are open-ended with no fixed time limit.

At first glance yes, this may sound like an equity release scheme, as the loan isn’t repaid until your home is sold. However, as you’re paying off the interest on a monthly basis, it’s only the original loan that’s due to be repaid once you sell up.

With equity release schemes, you don’t make any monthly repayments at all, so this means that all the interest payments are added up and rolled into the loan, so a much bigger chunk of your property is taken once it’s finally sold.

A Retirement Interest Only mortgage can offer a lifeline to customers who are nearing the end of their mortgage term on an ‘interest only’ basis but can’t afford to repay the capital and don’t want to instantly sell up.

Which lenders offer ‘Later Life’ lending?

Lots of lenders are in this market but deals vary between lenders. In most cases these options are available from age 55 and you can borrow from 40 to 60 per cent loan to value.

Loan to value looks at your mortgage loan compared with the value of your property. So if you’ve got a mortgage of £150,000 on a house worth £200,000, you’ve got a loan to value of 75 per cent as you have £50,000 as equity.

Newbury

You can borrow across its standard mortgage range with mortgages running up to your 90th birthday. Newbury also offers Retirement Interest Only, with no fixed term.

Leeds

The Leeds also offers a Retirement Interest Only mortgage to borrowers between 55 and 80.

You can get both five and 10-year fixed rate deals with rates starting from 3.62 per cent and you can ‘overpay’ by up to 10 per cent of the mortgage loan each year

Bath

Its ‘Retirement Interest Only’ mortgage is available from 65-plus with no upper lending limit.

No fixed mortgage term here, so you can keep it running until you downsize or pass away.

There’s a discount of 0.3 per cent off its standard variable rate with this product, which means right now you’d be paying 5.14 per cent.

Ipswich

Its ‘Later Life’ mortgages are for borrowers aged 50 or over, and with joint applications, just one borrower must be 50.

Loan terms are typically between five and 40 years, with no maximum age limit, but you’ll need a minimum annual income of £20,000.

However this doesn’t need to be ‘earned’ income from a job, but can be pension income or from other investments and savings.

You can borrow up to 75 per cent ‘Loan to Value’ (which is much higher than most lenders at between 40 to 60 per cent), up to a maximum of £500,000, and ‘overpay’ up to 50 per cent of the original loan amount.

Marsden

Flagged up as its’ ‘Older Borrower Mortgage’, this one is available to over-55s and as both interest only and repayment along with a RIO version, where you can opt to downsize as a means of repayment.

Affordability criteria take into account ‘earned income’ up to the age of 75 along with pensions, savings and income from property or investments. Interest rates start from 2.29 per cent.

You can only make ‘overpayments’ of up to five per cent of your outstanding loan with this one, so if you come into a lump sum and want to clear the loan you could face extra costs.

Family Building Society

The ‘Retirement Lifestyle Booster’ is an interest-only mortgage available for those aged 60 or over, and the ‘oldest’ borrower can be 79 at the time of their mortgage application.

You can either get a cash lump sum or a monthly income, in the form of a fixed amount every month, for up to 10 years.

You repay on an ‘interest only’ basis each month, and 10 years down the line, you owe the original lump sum, and can sell up and downsize to repay the loan.

Aldermore

Later Life Lending is available from 55 onwards. You can borrow between 10 and 44 years, on either a repayment or interest only basis, and within that there’s a range of fixed rate options from two to 10 years.

Aldermore doesn’t offer RIO products, which means that if you go for an ‘interest only’ deal, you’ll need to have a means of repaying the mortgage loan at the end of the term.

Minimum lending is £25,000 and the main features are that you can borrow from two up to 10 years and even extend your payments to the age of 99.

Cambridge

Upper age limits were removed from the entire mortgage range back in 2016, meaning anyone from 18 upwards can now apply for the entire mortgage range, and all cases will be looked at individually, based on both circumstances and affordability.

Interest rates and information correct as at March 1, 2019

Pros and cons of ‘RIO’ mortgages

Pros:

No need to prove you can repay the loan as it’s repaid from your home when you downsize

Flexible loan terms as often there’s no fixed term

Average interest rates of 3.5 per cent – lower than the average standard variable rate of 4.89 per cent

If you’re coming to the end of an existing ‘interest only’ mortgage and can’t repay the capital, you may be able to take out or switch to this type of loan.

Cons:

Your home will be sold to repay the loan when you downsize, die or go into long-term care. So that’s less in the pot to be shared between your family

Fall behind with repayments and you could lose your home.

What’s the advantage of a ‘RIO’ mortgage over equity release?

In many cases, your home is your most valuable asset in retirement, but if you’re ‘house rich’ but ‘cash poor’ – say, due to poor-performing investments – then equity release can be a way to release some of the equity that’s built up. It means you get a cash lump sum, without having to downsize.

However, it’s always been a case of treading carefully as while it can be a way to release cash to enable you to enjoy your retirement, it can also be a costly way to borrow over the long term. It can also have financial repercussions for your family if you’re looking to leave them the family home.

Here’s how it works. As a homeowner, you unlock a chunk of cash from the equity in your home, but unlike a standard mortgage, you don’t make any interest or ‘capital’ repayments while you’re alive.

All the interest due is ‘rolled up’ and the accumulated interest along with any charges is taken out of the sale of your home, along with the original loan, when you die or go into long-term care. Over time this can substantially reduce the amount of equity left in your home.

And when it comes to those interest rates, they’re generally much higher with equity release schemes than conventional mortgage borrowing. The average interest rate for equity release is 5.24 per cent, according to Moneyfacts, compared with an average standard variable mortgage rate of 4.89 per cent.

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