We are getting more frequent enquiries from homeowners who have had interest only mortgage products for many years. Now that they are approaching retirement, they find they have no obvious method to repay the mortgage in full.
They often approach us unsure what options they may have, other than selling their home, downsizing, or even moving to the rental sector. These clients are confronted with the need to find a more suitable mortgage product.
These homeowners are often referred to as mortgage prisoners in that they may well have intended to downsize when they started the mortgage, perhaps 25 years previously. Yet they were never able to afford to increase the payments on their mortgage so that it was repaid at the end of the term.
Some admit to never even having considered how they would eventually repay the mortgage.
What is Later Life Lending?
The regulator for the mortgage industry, the Financial Conduct Authority (FCA) and its predecessor the Financial Services Authority (FSA), have been encouraging lenders to innovate in their product design to assist these so-called mortgage prisoners.
This has resulted in the development of the Later Life Lending mortgage sector with quite a few lenders launching products designed to assist this type of client, aged 55 years or more. These products are often called retirement mortgages.
As a result, apart from selling their home, these clients have a few possible remortgage options;
- Remortgage to a Retirement Interest Only mortgage
- Remortgage to an Equity Release mortgage and pay the interest due on a regular or adhoc basis
- Remortgage to an Equity Release mortgage and allow the interest to roll up
Retirement Interest Only mortgage
This market sector has only really developed over the last couple of years and is the potentially lowest cost solution available to still mortgaged homeowners wanting to retain their home in retirement.
In March this year, the FCA clarified its rules for lenders and advisors for the Retirement Interest Only (RIO) mortgage sector. This provided certainty for lenders and resulted in many lenders either entering the market or declaring that they will enter it shortly.
This type of mortgage is potentially suitable for clients that can demonstrate they can afford the interest payments in retirement. The lender will need to satisfy itself that the mortgage can not only be afforded jointly, if appropriate, but also individually by each spouse or partner should the need arise.
Retirement Interest Only mortgages tend also to allow higher loan to value ratio mortgages, typically up to 60% of the property value. They also have the lowest interest rates and early redemption penalties in the Later Life Lending market place.
Some have no redemption penalties at all and can be useful for retired clients with a short-term lending need.
Retirement Interest Only mortgages tend to have specific end dates, typically on the 85th or 90th birthday of the youngest borrower, although some lenders are now allowing older ages.
Should a borrower reach the end date and not want to move, they will have access to Equity Release mortgages to repay the original Retirement Interest Only mortgage debt.
Equity Release Mortgages
Equity Release mortgages have been around for a few decades now. In the past, a lack of effective regulation allowed some questionable practice in the marketing and sales of this type of mortgage and the sector acquired a poor reputation, the effects of which can still be felt today.
To combat this, some lenders formed their own voluntary body to impose standards on both lenders and products. This body still exists today as the Equity Release Council.
Alongside this voluntary body, the industry regulators have laid down rules that product providers and advisors must abide by, including the requirement for additional qualifications for advisors active in this market.
As a result, clients can rest assured that today the advice they obtain and the products they buy meet high standards.
Equity Release mortgages do not have a requirement that the borrower repays the interest on a regular basis. Instead, the interest rolls up on a compound basis and is added to the loan.
As such, there is no requirement on the lender to assess the borrower’s ability to repay the loan, unless the borrower chooses to voluntarily repay the interest on, say, a monthly basis.
Maximum mortgage amounts are lower than for Retirement Interest Only mortgages and the interest rates tend to be higher. The older the borrower(s) the higher percentage of the property value is available as a maximum loan amount.
Some lenders will also increase the maximum loan amount if the borrower is in poor health which is likely to shorten their life expectancy.
Additionally, Equity Release mortgages tend to have larger redemption penalties as they are not viewed as a short-term lending solution.
It is possible to fix the interest rate for life, however, a feature not generally available for Retirement Interest Only mortgages.
Equity release mortgages are normally repaid on the demise or entering long term care of the last spouse or partner. Most mortgages have a no negative equity guarantee meaning the mortgage and rolled up interest debt can never exceed the value of the property.
For those borrowers concerned about leaving an inheritance for their family, it is also possible to build in an inheritance guarantee.
For more information, view our guide to equity release.
Have you considered your Lasting Power of Attorney?
Finally, many clients do not consider the implication of being unable to make decisions for themselves in later life. Having a Lasting Power of Attorney (LPA) allows a client to instruct their Attorney (usually a younger family member) to deal with their affairs should they become mentally incapacitated.
This is so important that some lenders will offer lower rates to applicants that have LPA’s. Again, a good advisor will consider Wills and LPA’s to be part of good holistic advice in the Later Lending marketplace. Lasting Power of Attorney is not regulated by the Financial Conduct Authority.
Finding the right mortgage for retirement
As you can see, there are a number of solutions for those clients wishing to pay off their mortgage lender at the end of the mortgage term as they approach or reach retirement. The options can appear confusing so it is important to get good quality mortgage advice.
Under the current regulations, all mortgage advisors can advise clients on Retirement Interest Only mortgages but only suitably qualified advisors can give holistic advice covering Retirement Interest Only mortgages and Equity Release mortgages. At VA Mortgages, rest assured that you will receive that holistic advice from a fully qualified advisor.
Contact our advisors today for a no obligation discussion about your circumstances.