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Getting a Retirement Interest-Only Mortgage in the UK

Everything you need to know about getting an interest only mortgage when you’re retired.

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By Pete Mugleston  | Mortgage Advisor Pete has been a mortgage advisor for over 10 years, and is regularly cited in both trade and national press.

Updated: 21st February 2020 *

If you’re retired and wondering what mortgage options there are for older borrowers, the good news is that there are plenty of lenders offering a specific range of interest-only mortgages for over 55s, 60s, 65s and beyond.

These products, which are known as retirement interest-only mortgages (RIOs), allow retirees to remortgage existing interest-only mortgages or release equity from their property.

In this guide we take a look at:

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What is a retirement interest-only mortgage?

RIO mortgages are available for over 55s and are similar to standard interest-only mortgages, in the sense that you make regular payments to cover the interest – the difference is that there is no end date.

The loan is only liable for repayment once the mortgage holder dies, moves into long-term care or sells their house, with the outstanding capital debt (invariably) deducted from the proceeds of the property sale.

Some lenders will require applicants to demonstrate minimum income levels to qualify for a loan, while others will judge prospective borrowers based on their ability to maintain interest repayments. Different lenders will offer different mortgage types (such as fixed-rate or variable products) at different interest rates.

Are there any age restrictions?

Some lenders may impose age restrictions, but many who offer retirement interest-only mortgages accept a minimum age of 55 with no maximum age at application. Loan-to-value ratios, term length and pension income amount will also vary from lender-to-lender.

You may be required to have a lasting power of attorney
(LPA) in place to be eligible to qualify for this mortgage type (in Scotland
this is called a continuing power of attorney).

Take a look at the age brackets below for more information. You can also make an enquiry and we’ll match you with a broker who can offer recommendations.

Over 55s 

As long as you meet the lender’s eligibility criteria,
you should be able to qualify for a mortgage. Different lenders have different
approaches to interest-only mortgages for over 55s but, broadly speaking, the rates,
criteria and policies are typically similar.

Many providers will typically allow eligible borrowers over 55 to take out loans between £30,000 to £500,000 (though other lenders will offer above and below these amounts), with rates varying depending on the amount you wish to borrow, term length, your age, your credit rating and other personal factors.

Over 60s 

Some lenders offering retirement interest-only mortgages
set the minimum age higher at 60 instead of 55.

Lenders will typically wish to see your pension statement
as evidence of income. Some will state a minimum income from your pension, for
example £30,000 per year.

Over 65s

Again, it is indeed possible. Some peg their minimum
lending age limit lower than 65, so they’ll offer interest-only mortgages to
over 55s while others require applicants to be at least 60 and some won’t do
business with anyone under 65.

The advisors we work with can go over all of the best interest-only mortgage options for over 65s and connect you with the right lender if you make an enquiry.

Over 70s

It’s possible to get a retirement interest-only mortgage
if you’re over 70. Maximum age limits can also differ from lender to lender –
some will offer interest-only mortgages for over 70s but put an upper-age cap
of 75 on interest-only retirement mortgages, others at 80 years or 85. Many
lenders who provide this loan type set no upper age limit on mortgage borrowing
at all.

If your age exceeds 80 or 85 at the point of application,
you may need additional underwriting approval. Some lenders will also set the
maximum age at term end without pension proof at 75, so it’s especially
important to prepare evidence of your pension income if you’re looking to pay
off your mortgage beyond this age.

Customers should also be aware that some lenders will
require borrowers to repay their mortgage loan by a certain age while the
majority of others will allow it to be paid off once the holder dies.

How much can I borrow?

Again, this is defined according to which lender is used. For example, there are lenders that will lend up to 50% of the value of the property at a maximum of £500,000 while others will lend up to 55% LTV with a maximum loan of £1.25 million. Some lenders will also impose a minimum property value – the lowest of which being £60,000.

Can retirement interest-only mortgages be repaid early?

Once again, this depends on the lender. For example, a number of them will allow borrowers to overpay interest-only mortgages for pensioners by up to 10% on fixed rate mortgages each year and as much as they like on standard rate loans without penalty, although others will charge an early repayment fee for any amount over 10% of the loan.

Conversely, some building societies and the challenger
banks will allow customers to overpay as much as they want without incurring
fines and have no early repayment penalty.

What are the pros and cons?

As with any loan of this type, prospective customers will need to evaluate whether an interest-only mortgage is right for their circumstances and to take some time to consider their options by referencing both the advantages and disadvantages that they offer.

Advantages 

Below are some of the pros associated with retirement
interest-only mortgages:

  • Loan amounts remain stable so long as interest rate repayments are maintained.
  • Allows borrowers to release equity from their property.
  • Allows borrowers to make over-payments on loan amounts and reduce their debt.
  • Increase the probability of passing on inheritance amounts to children or grandchildren (especially when compared to lifetime mortgages- see below).
  • Compound interest charges do not affect these types of mortgage.
  • Monthly payments are usually lower than for standard repayment mortgages and invariably cheaper than most lifetime mortgages.
  • Interest-only payments allow customers to minimise their outgoings and to prioritise other financial needs or considerations.
  • Removes unwanted financial pressures for those who wish to avoid downsizing. Offers flexibility for those who may wish to consider it in the future.
  • Could provide a lifeline for existing interest-only mortgage holders who have been unable to remortgage with another lender (see below).

Disadvantages

Below are some points to consider if you’re considering
taking out an interest-only retirement mortgage, especially if you’re over the
age of 60.

  • Borrowers need to pass affordability checks or to demonstrate minimum annual income sources in order to qualify.
  • Not suitable for customers with unstable or less secure incomes or for those with property values which fail to meet minimum requirements. Moreover, some lenders will restrict the types of income they will consider for applicants.
  • The borrower’s home will ultimately need to be sold in order to repay the loan.
  • Mortgage rates can be more expensive than for standard repayment mortgages.
  • Mortgage borrowers who choose a standard variable rate package could see their monthly payment rise if interest rates increase.
  • Not all brokers who arrange interest-only mortgage products are professionally qualified to advise customers on equity release options.
    This has prompted widespread concerns of a deepening ‘advice gap’ and the possibility that some customers could choose products which are unsuitable for their needs on the basis of this ‘compromised’ advice.

How does an interest-only mortgage affect inheritance?

As previously noted, the fact borrowers are often allowed
to overpay on their repayment schedules means debts could be minimised or even
cleared by the time the property is sold.

Alternatively, the option to release equity from a
property means that homeowners who wish to help their children or grandchildren
would be in a position to pass on early inheritance amounts, while the absence
of rolled up interest charges on loans would ultimately mean that there would
be more to leave dependants than with a lifetime mortgage.

If in doubt, however, customers should speak with an expert advisor.

Will my bad credit affect me getting an interest-only mortgage?

Because none of the three credit reference agencies used
by lenders to underwrite applications (CallCredit, Equifax and Experian) hold
financial information for longer than six years, customers with previously poor
credit histories who have maintained payments on loans or credit cards in that
period could still qualify for a retirement interest only mortgage (assuming,
of course, that they can demonstrate an ability to repay interest charges).

For example, if you’re aged 65 with a satisfied court county judgement (CCJ) with no other adverse and wish to apply for a retirement interest-only mortgage, you could be accepted by a lender. However, they’ll typically require a satisfactory explanation for the CCJ(s) along with evidence that it has been satisfied. 

Bear in mind that for financial bad credit incidents that have incurred within six years may need to consider an alternative means of finance (such as equity release options).

Speak to an expert for more information. 

What if I already have an interest-only mortgage?

One of the groups of people which are most likely to benefit from the introduction of these retirement interest-only products are those with existing interest-only deals, especially those that are coming to the end of their terms.

Research published by the Financial Conduct Authority
(FCA), for example, revealed that there were 1.67 million outstanding
interest-only mortgages (or 17.6% of all outstanding mortgage accounts) in the
UK, with one in nine of these customers aged 65 or above.

The financial watchdog conceded that current EU mortgage
rules (which have virtually outlawed interest-only retirement lending across
the continent) had left many thousands of elderly or financially vulnerable
customers with almost no means to repay these debts.

These included disqualifying pensioners from selling
their homes or moved into full-time care to service outstanding loans and
prohibiting customers with the up-to-date repayment records or the financial
means to keep up regular monthly interest payments from pursuing this option.

Which is why the FCA decided to relax these rules from
March 2018 onwards and to allow interest-only customers who are stuck with an
existing interest-only mortgage to remortgage on to an interest-only mortgage
for pensioners with another lender. The only problem here, of course, is if
these customers fail to meet income or property value requirements.

Speak to an expert

If you have questions and want to speak to an expert for the right advice, call us on 0808 189 2301 or make an enquiry. We’ll then match you with an expert advisor who can offer you advice and find the best deals for your circumstances.

Updated: 21st February 2020
OnlineMortgageAdvisor 2020 ©

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The info on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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