How to Manage Your Monthly Mortgage Payments in Later Life
In years gone by, 65 was seen as the age when a person could anticipate their retirement. However, the State Pension age has steadily increased due to the rise in the average life expectancy, so it’s no wonder that retirement can feel further away than ever.
Retirement is meant to be the chapter of your life when you can finally relax without work deadlines or timetables. Retirement should be the time when you are free from the shackles of employment and can fully enjoy your hobbies or socialising at your leisure.
At Henry Dannell, many of our enquiries are for mortgages that enable clients to enjoy the full and active retirement they’ve always envisioned. As such, in this article, we will be looking at three different types of Later Life mortgage products for borrowers aged 55 and over that could allow them to achieve their dream retirement.
The Later Life products we will look at allow borrowers to raise capital secured against their home, giving them the opportunity to support their family, repay an existing mortgage, or simply enjoy the retirement they had originally anticipated.
Later Life Products
There are three Later Life products that are typically available from age 55: Retirement Interest Only mortgages, Lifetime mortgages and Home Reversion schemes.
The benefits and disadvantages of a Retirement Interest Only mortgage
Also known as a RIO, a Retirement Interest Only Mortgage is an affordability-assessed interest-only mortgage, similar to a standard mortgage, but with an open term, hence the word Retirement.
The biggest difference between a RIO and the other Later Life products above is that borrowers need to prove income and are contracted to make monthly payments of the full interest.
By servicing the interest, the outstanding loan will not increase, while the remaining capital is usually repaid from the sale of the property once the last borrower has either died, or left the property to enter full-time care.
It is important to understand that with a RIO there is a risk of possession if the monthly payments are not maintained.
Some of the benefits:
- The loan-to-income multiples can be higher than with standard mortgages.
- RIOs can offer a larger loan-to-value than Lifetime mortgages (up to 75%).
- Different types of interest rate deals are available, from two-year to lifetime fixed rates, as well as discount rates, which may be more suitable depending on the borrower’s plans.
- The available loan is based on the income of the lowest earner so the loan is affordable and they can remain in their home as a sole occupant. This may mean the required loan is not considered affordable.
- RIOs are lump-sum only products. As such, there is no option to have funds in reserve for future objectives.
- If a borrower chooses any other interest rate deal than a lifetime fix, there is likely to be fees to remortgage when their deal expires and a risk that future interest rates are higher.
The benefits and disadvantages of a Lifetime mortgage
With a Lifetime mortgage, the homeowner retains full ownership of their property and has the right to reside for the rest of their life.
Lifetime mortgages do not require a commitment to monthly payments, as any payments made are entirely voluntary. However, making payments is recommended to mitigate any interest roll-up and to help protect the remaining equity in the property.
Upon the death or entering full-time care of the last borrower, any outstanding loan, plus any unpaid interest, fees or charges, is usually repaid from the proceeds of the sale of the property.
Some of the benefits:
- One of the unique benefits of a Lifetime mortgage is that the available loan is not based on income but on the age of the youngest borrower and their property value.
- You can release an initial lump sum and have funds in reserve for future objectives if loan to values allow, using the money released for a wide range of purposes (except investment).
- Available from age 55, with no maximum age.
- There is no commitment to making monthly repayments and Equity Release Council-approved plans include a no negative equity guarantee. As such, they offer flexibility to manage your outgoings in light of current economic conditions and make flexible, voluntary payments when you choose.
- The loan amount available increases with age, but with the lowest current Lifetime mortgage rate at around 6%, the maximum loan-to-value is unlikely to exceed 50% of your property value at any age.
- Equity release can impair your ability to claim means-tested benefits.
- Lifetime Mortgages aren’t meant as a short-term borrowing facility. As such, there are often higher early repayment charges compared to other mortgage options.
- Unlike a RIO, any unpaid interest on a Lifetime mortgage will compound and erode the remaining equity in the property, reducing the estate and inheritance for beneficiaries. This is also a key consideration where care costs are anticipated.
The benefits and disadvantages of a Home Reversion scheme
A Home Reversion scheme is another type of equity release. However, unlike a Lifetime Mortgage, a Home Reversion scheme is a sale and not a loan, so it does not incur any interest.
Home Reversion schemes involve selling a percentage of your property in return for a cash lump sum or for regular income.
With a Home Reversion scheme, you effectively become a tenant with a right to reside for life, but are responsible for the upkeep of the property.
Some of the benefits:
- A Home Reversion scheme provider may have broader lending criteria than a Lifetime mortgage lender.
- You can sell as little as 25% of your property.
- You can be sure of the percentage of your future property value that you leave to your beneficiaries.
- The main disadvantage of a Home Reversion is that you surrender ownership of your home. As this type of equity release is currently unpopular, there are a limited number of providers.
- Schemes are often from age 65, and you are likely to receive considerably less than the full market value of your property (typically up to 60%).
- Exiting the scheme early would mean purchasing any percentage sold at full current market value.
Learn more about our Later Life options
Later Life products, such as Lifetime Mortgages and RIOs, offer flexible solutions to help you realise your objectives in your later years.
At Henry Dannell, we make raising capital in later life as flexible as possible with our straightforward, one-time-only advice fee. For just a single payment of £1,295 (payable on completion of your mortgage), if you need to arrange a further advance or remortgage to an alternative Later Life product in the future, there is no fee payable for additional advice.
Henry Dannell is a proud member of the Equity Release Council and only recommend Equity Release Council-approved Lifetime Mortgages.
Equity release may not be suitable for everyone, so it’s worth speaking with one of our specialists to explore your options and learn more.
Please note: To understand the features and risks, always obtain a personalised illustration.