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?
Lenders have a pretty poor approach to older borrowers, especially in the mortgage market. Many will have a maximum age that they will lend to, usually ranging from 65 to 80. This means the closer you get to that age, the harder it can be to get a mortgage, or at least a decent rate.
This is made worse by homebuyers getting onto the property ladder later, so if a bank is worried you will be borrowing close to their maximum lending age, they may offer you a shorter-term to borrow over, which will make your monthly repayments more expensive.
This may leave you worrying 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.
A retirement interest-only mortgage is a product aimed specifically at older borrowers. Borrowers only pay the interest rather than the repayment portion of a home loan, which makes it cheaper. For example, a £150,000 two-year fixed-rate mortgage at 2% for 25 years would cost £250 a month on an interest-only basis, but would be £636 if you were also repaying the capital.
A retirement interest-only mortgage can be useful to those that are coming to the end of an existing interest-only mortgage. Traditionally, a lender would want you to repay the full loan at the end of the term, however this can be difficult for older 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.
Most retirement interest-only mortgages start at around age 55. There is also no set maximum age, as a retirement interest-only mortgage only has to be paid off once you sell your property, pass away, or go into long-term care.
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.
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 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 full capital. This is helpful if your income is low. 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 to mainstream products as there is no set mortgage term.
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.
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 the Society of Later Life Advisers or the Equity Release Council.
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.
- 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
- Still have to pass 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 retirement interest-only mortgages and the type of mortgage product they offer.
|Bath Building Society||Discounted variable rate|
|Beverley Building Society||Discounted variable rate|
|Family Building Society||Fixed and Discounted variable rate|
|Hanley Economic Building Society||Discounted variable rate|
|Hodge Lifetime||Fixed and Discounted variable rate|
|Ipswich Building Society||Fixed and Discounted variable rate|
|Leeds Building Society||Fixed|
|Loughborough Building Society||Fixed and Discounted variable rate|
|Marsden Building Society||Fixed|
|Melton Building Society||Fixed|
|Nationwide Building Society||Fixed and Discounted variable rate|
|Newbury Building Society||Discounted variable rate|
|Nottingham Building Society||Fixed and Discounted variable rate|
|Saffron Building Society||Discounted variable rate|
|Scottish Buiding Society||Fixed and Discounted variable rate|
|Tipton & Coseley Building Society||Fixed and Discounted variable rate|
|Vernon Building Society||Discounted variable rate|
Should I choose a retirement interest-only mortgage?
It is a 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 yours 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 adviser.
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?".