What’s a Retirement Mortgage?
A retirement mortgage is a term used to describe a loan available to retirees secured against their primary residence in the UK.
There are several types of retirement mortgages on the market, with the most popular types being lifetime mortgages.
When you take out a retirement mortgage, you’ll make repayments on the capital and interest portions of the loan or just on the interest part, and sometimes no repayments are needed.
A lifetime mortgage has no set term and is usually paid from the sale of your home when the last-named borrower has passed on or moved into permanent care.
How Is a Retirement Mortgage Calculated?
How a retirement mortgage is calculated will depend on the type of mortgage plan you choose.
If you opt for a retirement mortgage that requires a monthly repayment, such as a retirement interest-only mortgage, you’ll need to pass an affordability check.
Most later-life lenders will loan you 4.5 to 5x your annual income.
With a retirement mortgage, your provider may only be willing to grant you a 50% LTV1. This is normally because your risk is higher due to your retirement income, which may only be a pension.
If you choose an option such as a lump sum mortgage where you don’t have to make any repayments, then your LTV will increase with your age and property value.
In this case, each deal will be structured according to its unique circumstances.
How Is Interest Calculated on a Retirement Mortgage?
Interest on a retirement mortgage is calculated on a compound basis.
What this means is that you are charged an interest rate2 on your loan value daily; this amount is then added up monthly and added to your capital balance.
This interest value then becomes part of the capital balance on which the next month’s interest is calculated, so you really pay interest on interest.
The interest rate you’ll get depends on your circumstances; however, generally, a lifetime mortgage’s interest rate ranges from 5.20% to 6.30%.
What Are the Benefits of Using a Retirement Mortgage Calculator?
There are many benefits of using a retirement mortgage calculator, which will vary depending on the type of mortgage you choose.
Here we look at the benefits in detail.
- Retirement repayment mortgage – This calculator will help you determine how much you can borrow, how long a term you can expect and a possible interest rate.
- Equity release – Compares a lump sum mortgage vs a drawdown mortgage’s effect on interest charges.
- A flexible lifetime mortgage – Calculates the effect of regular payments on capital and interest portions vs no payments at all.
- RIO mortgage – Calculate the loan cost and the interest value you can expect to repay monthly.
Armed with the correct knowledge of retirement mortgage types, you can make an informed decision on what the best option is for you.
Types of Retirement Mortgages
The types of retirement mortgages include lump sum, drawdown, flexible and retirement interest-only.
Here’s more information.
A lump-sum retirement mortgage is a loan secured against your home in the UK.
You’ll receive a tax-free lump sum once-off; interest is typically compounded and paid with the loan value when you pass on or move into permanent care.
A drawdown retirement mortgage will also be secured against your UK home.
It pays out an upfront lump sum.
This is normally much smaller than a lump sum mortgage amount, but you have a drawdown facility to withdraw from when you need more funds.
Flexible retirement mortgages are great because you get a lump sum upfront tax-free, and you get the option to make repayments on the capital, interest or both.
The flexibility is that you can repay when you want to and can stop when you choose; with some providers, if you stop paying for over 6 months, it converts to a lump sum plan.
A retirement interest-only mortgage is available to retirees and is secured against your main UK-based residence.
With this plan, you’ll repay the interest portion monthly; the nice part is that you’ll never owe more than the initial capital amount as the interest value is paid monthly.