Retirement interest-only mortgages are a useful way to reduce your cash flow in retirement with the mortgage capital paid off when your property is sold.
In many ways, this is similar to a lifetime mortgage; only the interest is paid monthly, thereby just leaving the mortgage capital to repay.
In general, you would expect to see a reduction in your regular income as you move into retirement.
You may reduce your working hours, retire completely and therefore be dependent upon personal and state pension income together with any investments you may have.
So, what do you need to know about a retirement interest-only mortgage?
Will I Be Eligible for a Retirement Interest-Only Mortgage?
Retirement interest-only mortgages are targeted at older homeowners generally aged 55 and above. If your property is mortgage-free, or there is only a relatively small mortgage and significant equity, you could well be eligible.
As regular payments are required with this type of mortgage, you will need to pass a mortgage affordability test.
Can I Repay Capital if Affordable?
With a retirement interest-only mortgage you will also have the opportunity to make ad hoc capital repayments as and when affordable – these would be voluntary.
Obviously, this would reduce the original mortgage capital and as consequence interest payments would be lower.
What Is the Traditional Term for a Retirement Interest-Only Mortgage?
As with lifetime mortgages, the duration of the mortgage is open-ended with either the death of the homeowner or move into full-time care prompting the sale of their property.
The outstanding mortgage balance would be repaid out of the sale proceeds with the balance returned to the homeowner/executors.
This is one of the reasons why this type of mortgage is only applicable for those aged 55 and over.
How Much Can I Borrow With a Retirement Interest-Only Mortgage?
While individual lenders will vary slightly, in general, you can expect to borrow a maximum 50% of the value of your property (assuming it is mortgage free).
In the event that you are able to make regular capital repayments, you may see this figure increased to around 65%.
As a consequence, if you had a mortgage-free property worth £500,000, you could borrow £250,000 on an interest-only basis or £325,000 if you were also repaying capital each month.
You can check how much equity you can release using our equity release calculator.
How Do Lifetime Mortgages and Retirement Interest-Only Mortgages Differ?
There are two main differences; with a lifetime mortgage, the interest is rolled up and paid off when your property is sold. With a retirement interest-only mortgage you pay the interest each month.
As a consequence, a lifetime mortgage does not require a mortgage affordability test, but you will need to take one for a retirement interest-only mortgage.
What if I Fail the Mortgage Affordability Test?
The first thing to mention is that for a mortgage affordability test relating to a retirement interest-only mortgage the income bar would be reduced.
This is simply because you are not expected to repay the capital, and therefore you are only tested on the interest element.
This can be very useful for older homeowners who would prefer not to roll up the interest payment. They would likely have a degree of personal/state pension income and perhaps investments to fall back on.
How Do I Prove My Income for the Affordability Test?
You will need to provide the relevant paperwork regarding income from sources such as state benefits, state pension, personal pension and investment income.
The affordability test is based upon regular income.
Who Will Benefit From Any Capital Appreciation?
You will still be the named owner of the property, unlike a home reversion scheme where you actually sell a share of your property. As a consequence, you will benefit wholly from any capital appreciation over the term of the retirement interest-only mortgage.
It is important to remember that the death of the homeowner or move into full-time care will trigger the sale of the property.
Can I Move Property With a Retirement Interest-Only Mortgage?
There may be options to downsize or move to similar value property, but you would need to obtain the approval of your mortgage lender. This is no different from any traditional mortgage.
On the whole mortgage lenders tend to be fairly flexible as long as the value of the property far outweighs the outstanding mortgage.
Could I Switch to a Retirement Interest-Only Mortgage?
As you approach retirement, you may find that your short-term income is under pressure and consider switching from a repayment/interest-only mortgage.
You would need to approach your mortgage provider, but so long as there is significant equity in your property, there is no reason why they would not consider a switch.
How Do I Find the Best Retirement Interest-Only Mortgage Offers?
The Internet has opened up a whole new world for financial services and in particular, those looking at equity release options. While researching the Internet may bring you a raft of offers which look applicable to you, many people prefer to use the services of mortgage brokers.
These are experts in the field of mortgages/equity release and have contacts with which they can negotiate the best terms available.
It is worth noting that many of the promotional terms available to mortgage brokers may not be available to the general public.
How Much Should I Expect to Pay a Mortgage Broker?
There is no hard and fast rule when it comes to fees/commissions, but traditionally you would expect to pay between 0.3% and 1% of funds raised. Some brokers may charge a flat fee, some a mixture of flat fee and commission, while others will receive their income from the lender.
Either way, under current regulations, they need to be transparent and make you aware of any relationships with lenders.
Retirement interest-only mortgages are a perfect means by which to reduce your monthly outgoings and improve your cash flow.
Many lenders will also give you an option to make ad hoc capital repayments which will reduce the mortgage balance and interest charged.
The market is quite complex; there are many participants, so you may wish to consider the services of a mortgage broker.
How Can Equity Tree Help?
Here at Equity Tree, we have partnered with some of the UK’s leading Equity Release broker companies.
They have already helped thousands of people release equity already, and they can do the same for you.
Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.
If you would like to speak to one of these equity release companies, click on the below and answer the questions.