Retirement interest-only mortgages are finally making it fairer for older borrowers to access finance.
In this article, we look at what retirement interest-only mortgages are, how they work, and which lenders offer them.
What is a retirement interest-only mortgage?
A retirement interest-only mortgage is a type of mortgage aimed specifically at older borrowers. Borrowers only pay the interest charged on the mortgage loan amount and the loan itself remains the same until it is repaid upon the borrower's death or if they are moved to permanent long-term care. This is usually done by selling the property and using the proceeds to repay the loan.
Most retirement interest-only mortgages are available to people who are age 55 or older but age limits vary depending on the lender's terms.
How does a retirement interest-only mortgage work?
A retirement interest-only mortgage works in a similar way to a standard interest-only mortgage - you only repay the interest on your mortgage loan each month.
This can make it easier to get an interest-only rather than a full repayment mortgage as the lender will only do affordability calculations based on the interest payments rather than the capital and interest payments. For example, a £150,000 two-year fixed-rate mortgage at 3% for 25 years would cost £375 a month on an interest-only basis but would be £711 if you were also repaying the capital. This is helpful if your income is low and perhaps reduced in retirement. You may also be able to make some capital repayments with some lenders, which will reduce the overall debt.
Usually, with an interest-only mortgage, a lender will want to see evidence of a repayment plan. This isn’t required on a retirement interest-only mortgage as it is already agreed that the property will be sold to pay off the debt once you die, sell, or move into a care home. Retirement interest-only mortgages also work differently from mainstream products as there is no set mortgage term.
A retirement interest-only mortgage can be useful to those coming to the end of an existing interest-only mortgage. Lenders usually require you to repay the full loan at the end of the term, however, this can be difficult for some borrowers and so a retirement interest-only mortgage can be used to remortgage and pay off the old debt.
A retirement interest-only mortgage could also be used by older borrowers looking to purchase a retirement property who may struggle to meet a bank’s affordability criteria, or it could be used as a remortgage product to pay off debts or release equity tied up in a property.
Although retirement interest-only mortgages do not require specialist equity release advice, it is wise to speak to a trained mortgage professional* who can compare different options for you.
How much can I borrow with a retirement interest-only mortgage?
Lenders will have different limits on how much you can borrow, as they do with all sorts of mortgages. There may be requirements such as a minimum and maximum property value, and the amount you get will also depend on your income, expenses, and the lender’s affordability assessment.
Your age may also make a difference. If you still have lots of working years ahead of you, there will be more provable income that will help a lender assess affordability. But if you are close to retirement, you may have a less regular income. This can be an issue as lenders treat pension, savings, and investment income in a variety of ways which will impact how much you can borrow.
Reasons for choosing a retirement interest-only mortgage
Standard interest-only mortgage products are often limited to an end date that coincides with the borrower reaching age 75 and in many cases younger than this. This means the closer you get to that age, the harder it can be to get a mortgage, or at least a decent rate.
Due to homebuyers getting onto the property ladder later, it is likely that the mortgage term they are offered will be limited and may not allow some borrowers enough time to repay the mortgage debt - this leaves some people looking for a mortgage solution that will allow them to stay in their property later in life.
This may leave you worrying about whether you can get a mortgage when you are retired, but there is a solution for older borrowers. In 2018, the Financial Conduct Authority (FCA) altered its rules surrounding retirement interest-only mortgages. Previously, they were only offered under equity release regulations, meaning brokers needed certain qualifications. But now they are defined as traditional mortgages, meaning any broker can offer them and lenders are happier to make them available.
Retirement interest-only mortgages can also be used for purchasing a new home in retirement. Still, not all lenders facilitate this so it is wise to search the market and consult a trained mortgage broker to assist you with this.
Retirement interest-only mortgages are offered by a range of banks and building societies as well as through mortgage brokers. We provide a list of lenders that offer retirement interest-only mortgages below.
Is a retirement interest-only mortgage different to equity release?
A retirement interest-only mortgage sounds similar to an equity release, but the way it works is different. Borrowers still make monthly payments on a retirement interest-only mortgage. In contrast, an equity release lifetime mortgage gives you a cash lump sum but rolls up any interest and repayments, and they are repaid on death or when you move into care.
Equity release rates can often be higher as there is less choice of products on the market, and the debt can be larger as both interest and repayments are being rolled up, which can impact any future inheritance for potential beneficiaries. You will need to find a specialist equity release adviser to recommend a lifetime mortgage. Local advisers can be found through VouchedFor*, a service that allows you to
The pros of a retirement interest-only mortgage
- Financial flexibility - A retirement interest-only mortgage gives you more financial options as you get older. It means you may be able to avoid selling your home if you need to repay an existing interest-only mortgage, and also gives you the ability to withdraw cash from the equity in your property that older borrowers have struggled to do in the past.
- Easier to be approved - The affordability assessment is easier as your income is only assessed based on repaying the interest and you don’t have to worry about a deadline to repay the full loan.
- Lower monthly cost - Your monthly repayments will be cheaper on an interest-only basis rather than paying off the capital.
- Cheaper rates - The rates can also be cheaper than the alternative of an equity release lifetime mortgage as you are not rolling up the debt. This leaves a smaller debt to repay at the end and hopefully leaves some inheritance for future beneficiaries.
The cons of a retirement interest-only mortgage
- Affordability tests - A retirement interest-only mortgage is still treated in a similar way to a mortgage application. You will need to pass a lender’s credit checks and affordability tests.
- Harder to borrow large amounts - It may be hard to borrow large amounts if you are older and no longer working as you may have less provable income and your pension and investments may not meet the requirements.
- The loan is against the home - Similar to a traditional mortgage, your home is at risk if you don’t keep up with repayments and ultimately you will not be able to pass your home to any future beneficiaries as it will be sold to settle the debt.
Lenders that offer retirement interest-only mortgages
Below is a list of lenders that currently offer later-life lending options and we have highlighted who offers retirement interest-only mortgages.
|Lender||Lifetime Mortgage||Retirement interest-only mortgage||Home reversion plan|
|Bath Building Society|
|Beverley Building Society|
|Buckinghamshire Building Society|
|Crown Equity Release|
|The Family Building Society|
|Hanley Economic Building Society|
|Leeds Building Society|
|Legal & General|
|The Mansfield Building Society|
|Marsden Building Society|
|The Melton Building Society|
|Newbury Building Society|
|Nottingham Building Society|
|Penrith Building Society|
|Saffron Building Society|
|Scottish Building Society|
|Standard Life Home Finance|
|Suffolk Building Society|
|The Tipton & Coseley Building Society|
|The Vernon Building Society|
Should I choose a retirement interest-only mortgage?
It is positive that older borrowers are given more finance options, especially with people getting on the property ladder later in life. Additionally, accessing equity from your home can be useful if you don’t have much pension savings or don’t want to raid your retirement fund.
However, you are still taking on a debt, so you need to ensure you can afford the repayments as you will be putting your and your family’s home at risk. It can be useful to get financial advice to ensure you are making the right decision and to discuss any alternatives.
If you do not have a financial adviser, VouchedFor offers a free 30-minute financial health check with a regulated financial professional.
Retirement interest-only mortgage, equity release, or a lifetime mortgage?
An alternative to a retirement interest-only mortgage is equity release. Equity release lets you remain in your property and provides a tax-free cash lump sum (paid as a loan) secured against your property. Those aged 55 and over can apply for a lifetime mortgage and it works by rolling up the interest and the capital while you remain in the property and is repayable once you die or move into care. There is also a home reversion plan, typically available to those aged 60 or over, that gives you cash in return for a portion of your property. For more information read our guide: "How to release equity in your home – Equity release mortgages explained".
What are the alternatives to a retirement interest-only mortgage?
There are other alternatives available to older homeowners that do not require a financial product, such as downsizing to a smaller and cheaper property so you keep the difference, or selling and moving into rented accommodation. Another alternative to getting a mortgage is considering a personal loan, especially if you require smaller sums of up to £40,000. For more information, read our article: "Is it better to remortgage or get a loan?".
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