Older borrowers no longer need to feel restricted if they want to get a mortgage or access equity in their homes.
There are now increasing options as the lifetime and retirement interest-only (RIO) mortgage market grows amid an ageing population and people getting onto the ladder later.
These products provide those over-55 with a way to withdraw the cash tied up in their home to clear debts, fund their retirement, or spend as they wish.
The amount and cost of a loan will depend on your age and the property value, but here are your options when it comes to choosing between a lifetime or RIO mortgage:
What is a lifetime mortgage?
A lifetime mortgage is a form of equity release product that lets older homeowners release cash locked up in their home tax-free. It works similarly to a remortgage, but a lifetime mortgage is only available for borrowers from age 55.
Like a remortgage, equity can be taken from the value of the property tax-free as cash, but there are no monthly repayments. Instead, equity release providers roll up the loan amount and interest is paid back when you die or move into a care home.
Taking a lifetime mortgage requires a bit of inheritance planning as it means your beneficiaries may end up having to sell the property to settle the debt, although there are some plans that allow a proportion of the value to be passed on.
Historically, equity release products have been targeted at the retirement market to give a financial boost to those requiring extra income beyond their pension or to pay for care needs. However, it can also be used for other reasons such as paying off other debts, purchasing an additional property, to help loved ones, or just to spend on that dream trip during the golden years.
A lifetime mortgage may be right for you if it is difficult to remortgage. Lenders can be wary of approving remortgages for older borrowers due to strict affordability tests and income requirements when it comes to lending into retirement. The application process for a lifetime mortgage is less rigid and time-consuming than a remortgage as the equity release is mainly concerned about the property value.
Most lifetime mortgages are only available through brokers as it is a complex product that needs explaining so you understand the benefits and risks. There used to be a risk that the amount borrowed could exceed the value of the property if its valuation were to fall. But most lenders now offer a no negative equity guarantee that promises borrowers or their family will never have to pay back more than the value of the home.
What types of lifetime mortgages are available?
There are three types of lifetime mortgage:
- A lump-sum loan rolls up the interest until you die or move into a care home.
- A drawdown option that lets you withdraw funds in stages - this reduces the amount of interest as you only pay interest on the amount that you take.
- There are also options to make interest repayments during the life of the loan or enhanced mortgages for those with lower-than-average life expectancies, such as if you have a terminal illness.
How much does a lifetime mortgage cost?
There are a few costs associated with a lifetime mortgage.
Providers may charge an arrangement fee, typically ranging from £300 to £600, a valuation fee for the property of between £200 and £400 and solicitor fees ranging from £300 to £600. There may also be a fee if the product is being arranged by a mortgage broker or financial adviser. The lifetime mortgage will also come with an interest rate but you don’t actually pay this as it is rolled up and only repayable once you die or move into a care home. Lifetime mortgage providers typically lend up to 60% of the value of the property but the amount you can borrow will also depend on your age. Typically, the older you are, the more you can borrow.
Pros and cons of a lifetime mortgage
- Access equity in your property - Withdraw tax-free cash from the value in your home to clear debts or spend as you wish.
- Avoid lender remortgage restrictions - Banks can be wary of lending to older borrowers so this can be a good option for those aged 55 or older.
- No repayments - You don’t have to make any monthly capital or interest repayments as these are rolled into the loan and must be paid either once you die or move into long term care.
- Stay in your home - Rather than having to sell your home to pay bills or supplement your retirement income, you could instead get extra cash and not have to move.
- Harder to leave a property in a will - The property may have to be sold to payoff the loan so you would be unable to leave it to your family, although you can reserve a portion of the value as an inheritance.
- May affect state benefits - Any money you receive will boost your income, which could make you ineligible for benefits such as universal credit.
- High rates - The rates charged on lifetime mortgages are higher than a traditional remortgage and can range from 2.5% to 5%, but this is rolled together and only payable at the end of the loan.
Lifetime mortgage providers
The below comparison table shows a list of lifetime mortgage providers. The information was correct as of June 2021.
|Provider||Maximum LTV||Property Requirements||Borrowing|
|Legal & General||63.90%||Minimum property value: £100,000
Maximum property value: £2m
|Access to £2,500 as a cash lump sum or monthly income|
|More2life||59.28%||Minimum property value: £100,000
Maximum property value: n/a
|Access to £10,000+ as a cash lump sum|
|Just||57%||Minimum property value: £100,000
Maximum property value: £1m
|Access to £10,000 as a cash lump sum|
|LV=||55%||Minimum property value: £100,000
Maximum property value: £5m
|Access to £10,000 as a cash lump sum|
|Pure Retirement||54.60%||Minimum property value: £70,000
Maximum property value: £2m
|Access to £10,000 as a cash lump sum|
What is a retirement interest-only mortgage?
A relaxation of mortgage rules back in 2018 has opened up the market for retirement interest-only (RIO) mortgages. Previously, only brokers with equity release qualifications could offer these types of mortgages, but now anyone can. This has created a product that offers a good option for older borrowers who are approaching retirement age.
Those coming to the end of an interest-only mortgage may not be in the right age bracket to remortgage onto a traditional home loan so rather than selling the property, a retirement interest-only mortgage could be used to remortgage and pay off the old debt. Similarly, it may be harder for older borrowers to get a mortgage or remortgage on standard terms but a retirement interest-only mortgage could be used to buy a property or to clear other debts.
How does a retirement interest-only mortgage work?
Retirement interest-only mortgages are available to borrowers from age 55. As the name suggests, they are interest-only products, so you don’t make any monthly repayments. This means only the interest is repaid each month and not the capital. Unlike with a traditional interest-only mortgage, you don’t have to show evidence of a capital repayment plan as it is already agreed that it will need to be paid off either once you sell the property, die, or move into long-term care.
This also makes the application a bit easier as the affordability criteria is only assessed on the interest repayments rather than being able to meet the full amount. Check out our article "What is a retirement mortgage and should I get one?".
How much does a retirement interest-only mortgage cost?
You will only need to pay the interest each month and the capital only needs to be repaid once you die, if the property sold or if you move into a care home. This can make the monthly payments cheaper than a standard mortgage. However, these mortgages don’t have a set term so you could end up making interest payments for many years before it needs to be paid, which will need to be budgeted for. There may also be arrangement fees as well as legal and advisory costs.
The amount you can borrow varies according to the lender. Nationwide, which was the first major lender to enter the market in August 2019, has a maximum loan amount of £500,000. The loan-to-value (LTV) on these types of mortgages tends to be lower to reflect that you are paying less each month than a repayment mortgage. For example, Nationwide’s maximum LTV is 50%.
Pros and cons of a retirement interest-only mortgage
- Financial flexibility - Access cash tied up in your property during later-life so you can payoff debts or fund home improvements
- Low monthly cost - The rates are similar to a standard mortgage than an equity release product plus the monthly payments are low as you only pay the interest.
- Easier to get approved - The affordability assessment is based on your ability to repay the interest rather than the capital so it is not as tough as a full repayment mortgage application.
- More money to leave for beneficiaries - Unlike a lifetime mortgage, you are still paying interest on the debt so the amount left to settle may not be as large as with equity release, leaving more for an inheritance.
- Home is at risk - As with any mortgage, the loan is secured on your home so it is at risk if you fail to keep up with the payments.
- No end date - RIO mortgages have no fixed term. You will need to budget for this so if you took a loan at age 55, you could still be paying it off when you are in your 80s or 90s as it can be hard to predict if and when you will move and care or when you will die.
- May be harder to borrow large amounts - Borrowing large amounts could get harder as you get older as you will have to be able to show some sort of income.
Retirement interest-only mortgage providers
The below comparison table shows a list of retirement interest-only mortgage providers. The information was correct as of June 2021.
|Provider||Maximum LTV||Minimum Advance||Maximum Advance|
|Hodge||70%||£20,000||Whichever is the lowest of - £1.5m, 70% of the property value, or "the amount that is deemed affordable based on the individual circumstances of the homeowner(s)"|
|Tipton & Coseley Building Society||60%||£150,000||£1m|
|Buckinghamshire Building Society||60%||£25,000||£750,000|
|Bath Building Society||50%||£50,000||£500,000|
|Newbury Building Society||50%||£50,000||£500,000|
Lifetime mortgage vs Retirement interest-only mortgage
The below comparison table compares lifetime mortgages with Retirement Interest Only mortgages.
|Lifetime mortgage||RIO mortgage|
|Repayment method||No monthly payments - interest and repayments are rolled into the loan and paid back when borrower dies or moves into a care home||Interest is paid monthly but whole loan (interest plus capital) must be repaid once the borrower sells, dies or moves into a care home|
|Application process||No mortgage interview needed as an equity release provider will consider the value of your property||You will need to complete a mortgage application and pass income and affordability assessments but these will be more flexible as you are only paying interest and don’t need to provide a capital repayment plan|
Alternatives to lifetime or retirement interest-only mortgages
A lifetime mortgage is just one type of equity release product. Another option within this product range is a home reversion plan. These are available to those aged 60 or over and provide cash in return for a portion of your whole property. You can continue living in the property rent-free until you die or move into a care home, but must keep it maintained and insure it. Borrowers can often borrow larger amounts with a home reversion plan than equity release, but this may mean giving up more of your intended beneficiaries' inheritance once you die.
You could also consider a personal loan if you require smaller sums of up to £40,000, or even downsize to a smaller and cheaper property so you keep the difference. For more information on equity release, check out our article "What is equity release and how does it work? – Equity release mortgages explained".
Is a retirement mortgage right for me?
Borrowing becomes harder as you get older, as lenders worry about the prospect of getting their money back. Lifetime and RIO mortgages provide an interesting solution to this as it gives a lender the assurance that they will get the full value back eventually when the property is sold. This is by no means the only option and will be more expensive than simply downsizing or, if you only require smaller amounts, taking a personal loan or using a credit card sensibly.
Here are some key questions to consider before taking out a Lifetime or Retirement interest-only mortgage:
- Do you need to stay in your home?
- Can you afford the higher rates?
- Are you happy to leave your intended beneficiaries with a lower inheritance?
- How much extra income do you need, and are there other ways you can access cash?
These can be hard decisions to make, but a financial adviser can guide you on this and discuss the implications of equity release and RIO mortgages so you understand what you are getting into and any alternatives. If you are considering speaking to a financial adviser, check out our article "10 tips on how to find a good financial adviser".