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As an ageing population, people in the UK are living and working longer. Despite this, once you reach retirement age, the availability of interest only mortgages for pensioners dramatically reduces and those who are over 60 may find themselves with limited options. 

Following a review of European regulations in 2017, the FCA announced a new type of interest only mortgage to reduce barriers for creditworthy pensioners. 

What are my options?

Previously, the main options available for over 60s looking to get a mortgage, extend a mortgage term or remortgage a property were interest only or lifetime mortgages. Now, following a review from the FCA, there has been a push to create a hybrid which is more suitable for older borrowers. 

Interest only mortgages

With an interest only mortgage, the borrower only has to pay back interest until the end of the loan period. When this expires, the borrower pays off the remaining capital using a pre-agreed repayment vehicle such as a pension scheme, expected inheritance or sale of the property. 

The problem with interest only mortgages for pensioners occurs when older borrowers, who are relying on the sale of their house to repay the capital, look to extend their mortgage, even if they are comfortably repaying the interest every month. This can lead to some being forced to sell their home at the end of the loan period whether or not they’re ready to do so.

Lifetime mortgages 

Specific interest only mortgages for over 60's are often confused with another type of mortgage: the lifetime mortgage. With this product, a loan is secured against the value of your house and the value plus accrued interest is repaid when the last homeowner dies, moves into care or the property is sold.

Generally, lifetime mortgages are aimed at those aged 55+ who are looking to remortgage their property or extend mortgage periods but cannot, or don’t want to, pay the interest during their lifetime and would rather repay everything at the end of the loan period. 

Interest only retirement mortgages

Bridging the gap between interest only and lifetime mortgages are interest only retirement mortgages. These work as a hybrid whereby a borrower can repay loan interest during their lifetime, with the balance payable once the last owner dies, moves into care or sells the property. 

As there are no age limits affecting retirement interest only mortgages for over 60's, these can be an ideal way of releasing equity or purchasing a new property even after retirement. 

What mortgage periods are available for over 60s?

Commonly as we age, the loan period available for a mortgage repayment reduces to account for the length of time we are likely to be able to afford repayments. That said, as people are living and working longer, many providers have increased age restrictions to allow creditworthy retirees to access mortgage options. 

The benefit of interest only retirement mortgages is that the ‘retirement’ part means there is no fixed term for repayment. You can also pay off just the interest, or part of the capital as well, if you wish to reduce the final payment for your beneficiaries. 

For normal interest only mortgages for over 60's you are likely to hit an upper limit of a 15 - 20 year loan term, while 70 year olds may only be able to take out a loan for 10 years. This will vary by provider so make sure you check the terms of any mortgage before signing the paperwork. 

How much can be borrowed with a retirement interest only mortgage? 

The specific amount you can borrow on a mortgage will depend on the same factors whether you're 99 or 29 and each lender will have their own limits and requirements before they will approve you for any sort of loan. That said, generally interest only mortgages will usually offer less than loans whereby you also pay the capital during the loan period. 

In real terms, this may mean that you could borrow 50% of your property’s value on an interest only loan, or 65% on a capital repayment. 

Lenders will also want to look at the value of the property, your income and outgoings, affordability assessments and where your income is coming from. If your income is from a pension, this may be looked at differently to the way in which a lender would evaluate a working applicant to ensure you’re not a risk.

Things to consider before applying for a new mortgage 

If you’re considering taking out a mortgage or remortgaging your home, it’s worth making sure you’re ready for the affordability assessments and any other questions your lender might have for you. If it’s been a while since you last went through the mortgage process, or it’s your first time applying for a mortgage, ensure these three things are ready to give yourself the best chance of being approved:

One: Credit Score

When taking out any sort of loan, it’s always good to use a free credit check agency to ensure you have a good credit rating. The better the rating you have, the better loan rates you’re likely to obtain. If you have any concerns regarding your credit rating preventing you from getting a mortgage, speak to your mortgage broker for tips on how to improve your credit score. 

Two: Income Source

Before approving you for a loan, a lender will want to know that you can afford the repayments, even if the loan is an interest only mortgage. Checking that your pension and/or savings are sufficient to afford regular loan repayments for however long the term is intended to last will dramatically boost your likelihood of being approved. If you’re reliant on any benefits then it’s important to discuss this with your mortgage broker to ensure your mortgage will not affect or be affected by this. 

Three: Repayment

In looking to get a mortgage in older age, although it might not be a pleasant conversation, it’s important to establish how the capital of your loan will be repaid should something happen to you. With a lifetime mortgage or retirement interest only mortgage this will usually be through the sale of the property when you pass away or move into a care home. However, it’s still important to ensure that the value can be repaid in order to reduce the financial burden on your beneficiaries should you pass away with your loan unpaid.