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 mortgagesWith 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 mortgagesSpecific 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 mortgagesBridging 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.