If you’re retired and are concerned about your income, a retirement mortgage might be exactly what you’ve been looking for.
Retirement mortgages have been designed specifically for later-life borrowers and could help you retire more comfortably.
There are so many options on the market to choose from, which can be overwhelming, but we’re here to help you sift through the details and find sound information.
As experts in our field, we discuss the following in this article:
Our team of market specialists at EveryInvestor spends most of their time analysing market trends and new products to ensure we give you the most up-to-date information.
Here’s the most recent news about retirement mortgages.
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Different Types of Retirement Mortgages
The different types of retirement mortgages include lifetime mortgages, home reversion plans, and retirement interest-only mortgages.
Here we look at these in more detail.
Lifetime Mortgage Equity Release
Lifetime mortgage equity release is a term used to encompass a range of lifetime mortgage products available to retirees.
A lifetime mortgage is a loan for retirees secured against your property and settled along with interest charges when you pass on or move into permanent care.
With a lifetime mortgage, you’ll release equity from your home whilst still retaining ownership; there are no mandatory repayments.
Home Reversion Equity Release
Home reversion equity release is essentially a product offered by a home reversion provider.
With home reversion, you’ll release equity from your property by selling a part or all of your property to a provider.
In return, you’ll receive a tax-free lump sum which will be lower than your property’s market value, along with the right to remain in your home as a life tenant.
Retirement Interest-Only Mortgage (RIO)
A retirement interest-only mortgage is a later life mortgage that will pay you a tax-free lump sum from your property. However, you have to make fixed monthly interest repayments.
Lifetime Mortgage Equity Release
A lifetime mortgage is a popular equity release product amongst retirees because it doesn’t require mandatory repayments and allows them to access tax-free cash.
How Does a Lifetime Mortgage Work?
A lifetime mortgage works in that it’s a loan secured against your property, you receive a tax-free lump sum, and you’re not required to make any mandatory repayments.
The loan is usually settled when you pass on or move into permanent care using the proceeds from the sale of your home.
How Is Equity Release Paid When You Use a Lifetime Mortgage?
Equity release is paid from the proceeds of the sale of your home when you use a lifetime mortgage.
In some cases, you can make repayments on the interest or capital portion or both to reduce the amount owing when you pass on or move into long-term care.
What Are the Different Types of Lifetime Mortgage?
There are different types of lifetime mortgages, with the most popular options being drawdown lifetime mortgages and flexible lifetime mortgages.
Here’re more details.
- Drawdown lifetime mortgages – This allows you to take a combination of a lump-sum payment and further withdrawals from a reserve facility should you need more cash.
- Interest roll-up mortgages– Interest is rolled up and included with the loan amount for repayment when you pass on or move into permanent care.
- Flexible mortgages – You’ll be paid a tax-free lump sum, and you can repay the interest and capital portion as you want while having the freedom to stop or start paying at any time.
- Enhanced lifetime mortgages – Available for those with ill health who need access to a higher percentage of equity at lower rates.
What Are the Lending Criteria for a Lifetime Mortgage?
The lending criteria for a lifetime mortgage are varied; however, for most, the youngest lender needs to be over 55 years old.
- Your property needs to be valued at a minimum of £70,000.
- Your primary residence that’ll be used as security needs to be UK based.
- You should have no mortgage or a small mortgage on your home.
What Are the Costs Associated With a Lifetime Mortgage?
The costs associated with a lifetime mortgage are valuation, application, adviser, solicitor, and closing fees.
These costs usually total between £1500 and £3000.
What Are the Benefits of a Lifetime Mortgage?
The benefits of a lifetime mortgage are that you can release equity from your home without mandatory monthly repayments, as the loan will be settled when you pass on or enter care.
More benefits include:
- You can live more comfortably during retirement with the cash you can access.
- You retain homeownership as well as get to stay in your own home.
- It allows you to get access to finance in your golden years.
- Later life mortgages have become more flexible and have better benefits than ever before.
- You can use the cash you access for anything you wish.
What Are the Drawbacks of a Lifetime Mortgage?
The drawbacks of lifetime mortgages include reducing the inheritance you leave to your heirs.
Here are a few other drawbacks:
- If you don’t use a reputable provider, you can end up owing more than your home is worth.
- You could incur early settlement charges if you want to pay off your loan or move house.
- Moving home can be tricky with a lifetime mortgage in place.
- Interest rates are higher than a traditional mortgage.
How Can I Get the Best Deal on a Lifetime Mortgage?
To get the best deal on a lifetime mortgage, it’s best to talk to your independent financial adviser who has equity release experience.
They’ll be able to source products from the whole of the market to give you the best advice and find the deal most suited to your needs.
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Home Reversion Equity Release
Home reversion equity release was the precursor to lifetime mortgages.
It entails selling all or part of your home to a provider in exchange for a tax-free lump sum and lifetime tenure.
What’s a Home Reversion Plan?
A home reversion plan is when you sell all or a share of your home to a specialist home reversion provider.
It’ll purchase part of your property for a lower value than the market value rate and pay you a tax-free lump sum in exchange.
You’ll lose your homeownership in full or in part, and in exchange, you get lifetime tenure in your property.
How Does a Home Reversion Plan Work?
A home reversion plan works by selling all or part of your home to a provider offering home reversion.
In exchange, you stay in your property for life.
Your home will be sold when you pass away or move into care to recover the costs.
How Much Money Could I Receive With a Home Reversion Plan?
The maximum amount of money you can receive with a home reversion plan is usually 60% of your property’s market value.
The amount you can get will increase as you get older.
What Are the Lending Criteria for a Home Reversion Plan?
The lending criteria for a home reversion plan are that you need to be over 55; some providers, however, require you to be over 60.
Your home has to be based in the UK, and it has to be your primary residence.
What Are the Benefits of a Home Reversion Plan?
The benefits of a home reversion plan are that you receive a tax-free lump sum, which means you don’t have to worry about inheritance tax on your home.
You can stay on in your home as a life tenant and don’t pay rent.
Other benefits include that there’s no interest on a home reversion plan, so the only amount you need to repay is the percentage stake you sold in your home.
If property prices decrease, you’ll have achieved a higher value for the share of your home that you’ve sold.
What Are the Drawbacks of a Home Reversion Plan?
The drawbacks of a home reversion plan are that you lose ownership of your house and that you won’t benefit from increases in property prices in the future.
Another drawback is that you reduce the inheritance you leave your loved ones when you pass away.
You’ll receive much less than what your property is worth on the open market; it could be up to 60%, but it could be as little as 20%.
Home Reversion Plan vs Lifetime Mortgage
Lifetime mortgages are far more flexible than home reversion plans and allow you to retain homeownership.
Lifetime mortgages have far more optional benefits than home reversion plans, designed to protect the lender, such as downsizing protection and no-negative-equity protection.
Home reversion plans were the precursor to lifetime mortgages and are not a popular product in the equity release space anymore; however, it has its place in certain cases.
Retirement Interest-Only Mortgages
Retirement interest-only mortgages are a relatively new type of mortgage for later life borrowers; with this product, you only repay a fixed monthly interest instalment.
What’s a Retirement Interest-Only (RIO) Mortgage?
A retirement interest-only mortgage is a later life lending product that’s also secured against your home in return for a tax-free lump sum.
With some retirement interest-only mortgages, the interest rates can be variable, so monthly repayments could differ; however, the rate is normally fixed.
You could, however, face repossession of your property if you don’t keep up with your monthly interest repayments.
Who Offers RIO Lifetime Mortgages?
RIO mortgages are offered by banks, building societies and other mortgage lenders specialising in retiree lending.
How Much Do I Need to Repay Each Month With an Interest-Only Lifetime Mortgage?
You must repay the interest portion each month on an interest-only lifetime mortgage.
The interest rate is generally fixed, so the repayment amount will not vary for the loan’s lifetime.
The amount you pay will depend on the interest rate you get and how much you lend.
What Are the Lending Criteria for an Interest Only Lifetime Mortgage?
The lending criteria for an interest-only lifetime mortgage are the same as most lifetime mortgages.
- The youngest applicant needs to be over 55.
- Your home must be valued at £70,000 or more.
- Your house should be based in the UK.
- You need to pass affordability checks.
What Are the Best Rates for Retirement Interest-Only Mortgages?
The best rates currently for retirement interest-only mortgages are, on average, 3.6%.
What Are the Benefits of a Retirement Interest-Only Mortgage?
The benefits of a retirement interest-only mortgage are that the capital value you’ll owe when you pass on or move into long-term care doesn’t change, as you pay the interest off monthly.
Other benefits include:
- You remain the owner of your home.
- The inheritance you leave your loved ones will be more than a regular lifetime mortgage as the interest doesn’t roll-up and get added to the loan amount.
- There’s no set term for a retirement interest-only mortgage.
- You can switch from a retirement interest-only mortgage to a roll-up mortgage at any time if you can’t afford the repayments.
- You don’t have to pass affordability checks for a retirement interest-only mortgage.
What Are the Drawbacks of a Retirement Interest-Only Mortgage?
The drawbacks of a retirement interest-only mortgage include that you have to make monthly repayments on the loan’s interest portion, which may not be affordable.
Other drawbacks include:
- You might incur early settlement penalties if you pay off your retirement interest-only mortgage early.
- You reduce the inheritance you leave your loved ones with any lifetime mortgage.
- You could face repossession if you don’t maintain repayments every month.
- The income from a retirement interest-only mortgage can affect your eligibility for means-tested benefits.
Are Retirement Interest Only Mortgages (RIO’s) a Type of Equity Release?
No, retirement interest-only mortgages aren’t a type of equity release.
Are Retirement Mortgage Products Regulated?
What Retirement Mortgage is Right For Me?
To find out what retirement mortgage is right for you, it’s best to contact your financial adviser, who will conduct a needs analysis to find the right product for you.
How Flexible Are Retirement Mortgages?
The newer retirement mortgages are much more flexible than they used to be and include benefits like inheritance protection, downsizing protection and no early repayment charges.
How Long Does It Take To Arrange a Retirement Mortgage?
It takes between 4 to 6 weeks to arrange a retirement mortgage.
What’s the Maximum Age for a Retirement Mortgage?
Most providers set the maximum age for a retirement mortgage at 90 years old, and some will stop at 88.
How Do You Repay a Retirement Mortgage?
You repay a retirement mortgage with the proceeds of the sale of your home when you pass on or move into permanent care3.
You can also repay it early if you choose to, but you could face early repayment charges.
Retirement mortgages offer an incredible opportunity for homeowners over 55 to unlock the financial freedom needed in this tough economic climate.
It’s important to note that a retirement mortgage can impact your means-tested benefits, so this is important to discuss with your financial adviser.
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