What’s a Retirement Mortgages and How Does It Work in the UK in 2024?

Explore the Benefits of Retirement Mortgages, From Boosting Income to Accessing Equity. Uncover How They Can Transform Your Financial Future. Learn More…
  • Last Updated: 30 Jan 2024
  • Fact Checked
  • Our team recently fact checked this article for accuracy. However, things do change, so please do your own research.

Contributors:

Francis Hui

Key Takeaways

  • A retirement mortgage in the UK is a long-term loan designed specifically for retirees, allowing them to borrow money against the value of their home while continuing to live in it.
  • Qualifying for it in the UK requires you to be over 55, own your property outright or have a small outstanding mortgage, and it's based on both your income and your property's value.
  • The benefits include the ability to release cash tied up in your home, the potential for lower interest rates, and the flexibility to make regular or lump sum repayments.
  • Risks associated with retirement mortgages include the possibility of falling into negative equity if property prices drop and the potential for the debt to increase over time due to compound interest.
  • You can use equity release to pay it off, effectively converting the mortgage into a loan that is repaid when the home is sold or when you pass away.

The ever-increasing cost of living is forcing us all to tighten our belts, and that is why a retirement mortgage is gaining momentum for older people on a fixed income.

As of 2021, the estimated life expectancy for males in the UK is 79.4 years, and for females, it is 83.1 years.1 

Given these facts, mortgages for later life, like retirement mortgages are becoming a very attractive option, simply because people are outliving their pension savings and need to access another source of income to improve the quality of their lives.

In This Article, You Will Discover:

    The Every Investor team of writers has put together this compendium of information on retirement mortgages to keep you well-informed. 

    Read on.

    What Is the Best Retirement Mortgage for Over 65s in the UK?

    The best retirement mortgage for over 65s in the UK is generally considered to be a lifetime mortgage. This mortgage type allows you to borrow a portion of your house's value while maintaining ownership.

    It's a particularly appealing option as the loan, plus interest isn't repaid until you die or move into long-term care, providing financial flexibility. However, every individual's circumstances are unique.

    For those seeking lower interest rates and who can afford regular repayments, Retirement Interest Only (RIO) mortgages may be a more suitable option. These types of mortgages require only interest payments until your property is sold.

    Always remember to seek professional advice to choose the mortgage that best suits your retirement needs and financial circumstances.

    What Is a Retirement Mortgage?

    A retirement mortgage can be best described as a financial product category that allows older people to access the equity in their homes without having to sell or move out.

    Now more than ever, rising house prices, longer-term mortgages, and increasing living costs mean that people are carrying debt well into their 70s.

    This explains the burgeoning popularity of the later-life lending market, which was valued at £153.9 billion in 20222 and is expected to carry on growing.

    Another contributing factor is that we are living longer, healthier lives and opting to work beyond the conventional retirement age. 

    Another interesting trend

    Although it is always been around, the barriers of entry for first-time homebuyers mean the ‘Bank of Mum and Dad’ is playing a more significant role.

    Parents, and even grandparents, are releasing equity to obtain their offspring onto the property ladder.

    It is predicted that the retirement lending market's evolution will likely persist over the next year and beyond as more mortgage lenders adapt to the shifting retirement landscape and broader mortgage market dynamics. 

    What Types of Retirement Mortgages Are There?

    The primary types of retirement mortgages are equity release and retirement interest-only (RIO) mortgages.

    Equity release (lifetime mortgages and home reversion plans) has been around for decades, while RIOs are a fairly new product.

    There is no doubt that given the potential of this market to lenders, more and more innovative plans will come to market. 

    In fact, in a 2022 advisor survey, 38% of the respondents said there needed to be more mortgage options made available for the 55+ cohort, 36% felt that ER needs to be more flexible, and 14% felt that there needs to be more RIOs.3 

    Lifetime Mortgage

    A lifetime mortgage is by far the most popular equity release plan among people looking to access the equity in their homes during retirement, providing either a lump sum, regular withdrawal options, or a combination of both. 

    The best part? 

    The homeowners can continue to live in their homes for as long as they wish or until they move into long-term care.

    According to a survey, lifetime mortgages have seen a surge in interest from younger age groups, with a 10% increase in lifetime mortgage customers aged 55-64 between 2019 and 2021.4

    This trend highlights that equity release is no longer just a financial solution for the elderly. Still, it is becoming an attractive option for those approaching retirement.

    In the wake of the pandemic and the cost-of-life crisis, there has been a shift in what people are using equity release for.

    In 2022, there was a jump in the amount of equity used for the harsher realities of life, such as repaying debt, with almost 60% (£3.78 billion) used from 54% the previous year, the same survey reported.

    Home Reversion Plan

    In reality, home reversion plans are dinosaurs, representing a very small percentage of the equity release market.5

    The reason is that there are far more flexible product options on the market, where the homeowner retains autonomy over his property.

    With a home reversion plan, homeowners sell a portion or all of their property to the lender, although they retain the right to remain living in their home as non-rent paying tenants until they die or go into care.

    Retirement Interest-Only Mortgage

    With a retirement interest-only (RIO) mortgage, homeowners seek to tap into their property's equity during retirement and only pay the interest each month, which keeps a lid on compounding.

    The mortgage term is typically open-ended, with the loan repaid when the borrower sells the property, moves into long-term care, or passes away.

    Although relatively new, the retirement interest-only mortgage market has seen significant growth since its introduction in 2018. 

    This growth indicates that more and more retirees are exploring RIO mortgages as a viable option to access their home equity while maintaining monthly repayments.

    However, it is important to note that making monthly interest payments may not be suitable for everyone, especially those with limited income during retirement. 

    How Do Retirement Mortgages Work?

    Retirement interest-only mortgages work according to a standard procedure, which includes meeting the eligibility criteria, going through an application, and meeting the agreement’s T&Cs.

    Eligibility Criteria 

    The eligibility criteria for retirement interest-only mortgages take into consideration your age, property value, property type, and income. These criteria differ from those of lifetime mortgages and home reversion plans.

    Here is a general overview 

    Age

    • Lifetime mortgage: Must be at least 55 years old
    • Home reversion plan: Generally 60-65, depending on the lender
    • RIO: Must be at least 556

    Property value

    • Lifetime mortgage and home reversion plan: minimum value threshold of £70,000
    • RIO: Loans are capped at 50-55%7 of the property value, although some lenders will go higher.

    Property type

    • Lifetime mortgage and home reversion plan: Must be your primary residence and conform to the lender’s criteria of property type and condition.
    • RIO: Must meet lender’s criteria on type and condition.

    Existing mortgage

    • Lifetime mortgage and home reversion plan: Any existing mortgage or secured loan on the property must be repaid either before or upon completion of the equity release.
    • RIO: Any existing mortgage on the property will typically need to be repaid with the proceeds from the RIO mortgage.

    Income

    • Lifetime mortgage and home reversion plan: No proof of income is needed, as there is no repayment obligation during the life of the plan.
    • RIO: Borrowers have to demonstrate that they have enough income to cover the monthly repayment.

    Please note that these are general guidelines, and specific criteria may vary among retirement mortgage providers

    Application Process 

    The application process for each type of retirement mortgage—lifetime mortgages, home reversion plans, and retirement interest-only (RIO) mortgages—may vary depending on the provider. 

    However, the fundamentals are the same across the board.

    Research and consultation

    Research providers, their products, and interest rates. 

    Consult with a financial advisor to discuss your options and understand the implications of a retirement mortgage.

    Initial application

    Complete an application with the help of your financial advisor or directly through the provider, providing personal and property details and information on your financial situation.

    Property valuation

    The provider will arrange for an independent valuation of your property to determine its market value and the amount you can borrow.

    Offer 

    If your application is approved, you will receive a mortgage offer outlining the loan terms, interest rates, and fees.

    Legal process

    A solicitor will review the mortgage offer, ensure all legal aspects are in order, and handle the necessary documentation.

    Completion

    Once all paperwork is completed and signed, the funds will be released to your solicitor, who will then transfer them to you or use them to repay any existing mortgage.

    Loan Amounts and Repayment Terms 

    Loan amounts and repayment terms for each type of retirement mortgage—lifetime mortgages, home reversion plans, and RIO mortgages—can vary depending on the provider and individual circumstances. 

    Loan amounts

    • Lifetime mortgages: Loan-to-value (LTV) ratios can range from 20% to 60% or more.
    • Home reversion plan: The amount you receive is typically lower than the market value of the sold portion, as the provider assumes the risk of property value fluctuations.
    • RIO: Typically 50-55% of the value of the property, but some lenders will go higher.

    Repayment terms

    • Lifetime mortgage: Capital and interest will be paid out of the proceeds of the property upon death or going into care. The balance will go into your estate.
    • Home reversion: The property is sold upon death or going into care and the proceeds are split according to the shareholding.
    • RIO: Monthly interest repayments are mandatory.

    Please note that these are general guidelines, and specific loan amounts and repayment terms may vary among providers depending on specific borrower circumstances.

    What Are the Benefits of Retirement Mortgages?

    The benefits of retirement mortgages include the financial freedom they offer in your later years, such as providing a regular income stream through the option to access equity and not having to downsize.

    Regular Income Stream

    One of the key advantages of retirement mortgages is the ability to establish a regular income stream during retirement. 

    This can be particularly helpful if your pension income may not be sufficient to maintain your desired lifestyle or cover unexpected expenses. 

    By tapping into the equity of their property, you can supplement your income and create a more stable financial future. 

    Sadly, 1 in 6 pensioners in the UK live in poverty8, so retirement mortgages can serve as a valuable tool to help mitigate financial stress and improve your quality of life.

    Option to Access Equity

    Retirement mortgages offer the flexibility to access home equity in various ways, depending on the borrower's needs and preferences. 

    For instance, you can choose to receive a lump sum, access smaller amounts as needed, or even a combination of both.

    This flexibility allows you to tailor your equity release to address specific financial goals, such as debt consolidation, home improvements, or funding long-term care. 

    One in four retired homeowners (28%) cited having accessed their property wealth through a means other than equity release, for example, remortgaging, downsizing or taking out retirement interest-only mortgages.9

    This trend underscores the increasing popularity of retirement mortgages as a viable solution for accessing home equity in later life.

    No Need to Downsize

    One of the major benefits of retirement mortgages is that they enable homeowners to access the equity in their homes without having to downsize or move to a smaller property. 

    This allows retirees to continue living in their cherished family homes and maintain the emotional connections and social networks they have built over the years. 

    A compelling fact is that a survey showed that 62% of homeowners aged 55 and over, expressed a strong desire to remain in their current homes.10 

    Retirement mortgages can help these individuals achieve that goal while tapping into their property's value to address financial needs.

    Inheritance Protection

    While releasing equity from your home can reduce the inheritance left for beneficiaries, some retirement mortgage products offer inheritance protection features. 

    These options allow borrowers to safeguard a percentage of their property's value to be passed on to their loved ones, providing a balance between accessing the required funds and preserving a portion of the estate for inheritance. 

    An interesting insight is that the growing demand for inheritance protection has led to increasing equity release providers offering these features, reflecting the importance many retirees place on preserving wealth for future generations.

    What Are the Drawbacks of Retirement Mortgages?

    The drawbacks of retirement mortgages include that they can reduce the inheritance you leave behind, could have an impact on benefits and interest, and in rare cases, could subject you to negative equity. 

    Retirement mortgages are not the silver bullet for financing your retirement. 

    Let us explore the drawbacks in more detail.

    Reduced Inheritance

    A potential drawback of retirement mortgages is the reduction in the inheritance left for beneficiaries, as the amount available upon the property's sale may decrease. 

    This can be particularly concerning for those who wish to leave a substantial legacy to their loved ones. 

    According to the Office for Budget Responsibility, inheritance tax receipts are projected to reach £7.2 billion by 2023-24.11 

    This illustrates the importance many families place on passing down wealth to future generations, and the potential impact of retirement mortgages on inheritance should be carefully considered.

    Possible Negative Equity

    While uncommon due to regulatory safeguards, negative equity is a potential risk associated with some retirement mortgages, particularly when property values decline. 

    Negative equity occurs when the outstanding mortgage balance exceeds the property's value, which could result in beneficiaries inheriting debt rather than an asset. 

    The Equity Release Council's No Negative Equity Guarantee helps mitigate this risk for lifetime mortgages, ensuring that borrowers will never owe more than the property's value upon sale. 

    However, not all retirement mortgage products may include such protections, so thoroughly understanding any chosen product's terms and potential risks is essential.

    Interest Accumulation

    For lifetime mortgages, interest accumulation can be a significant drawback. 

    As interest compounds over time, the overall debt can grow substantially, especially if borrowers choose not to make any repayments during the loan term. 

    This can result in a larger portion of the property's value being consumed by the mortgage, leaving less for beneficiaries or other financial goals. 

    Most lenders allow their clients to make voluntary interest payments to keep a lid on compound interest.

    In fact, the Equity Release Council introduced an additional safeguard in March 202212, allowing new equity release customers to make no-obligation, voluntary repayments on their plans. 

    Impacted Benefits

    Another drawback of retirement mortgages is the potential impact on means-tested benefits. 

    By releasing equity from their homes, retirees may inadvertently increase their assets or income, which could affect their eligibility for certain benefits, such as Pension Credits or Council Tax Reductions. 

    As these benefits can provide crucial financial support for retirees, it is essential to carefully assess the potential impact of retirement mortgages on benefit eligibility before proceeding.

    How Is a Retirement Mortgage Different From a Regular Mortgage?

    A retirement mortgage differs from a regular mortgage in several key aspects, primarily related to the target demographic, repayment terms, and eligibility criteria.

    Retirement mortgages are specifically designed for older borrowers, usually aged 55 or 60 and above, who are approaching retirement or are already retired. 

    Regular mortgages cater to a broader age range, typically starting from 18 years old.

    With regular mortgages, borrowers make monthly payments to repay the principal and interest over a fixed term, usually between 15 to 30 years. 

    In contrast, retirement mortgages offer different repayment structures.

    With equity release products, repayment is only when you die or go into long-term care, although with a lifetime mortgage, you have the option to make voluntary repayments.

    Borrowers of RIO mortgages make monthly interest payments but do not repay the principal until they die or move into long-term care. 

    The outstanding loan balance is then repaid, usually through the sale of the property.

    What Factors Should You Consider Before Taking Out a Retirement Mortgage?

    There are several factors to consider before taking out a retirement mortgage, namely age limitations, interest rates and fees, estate planning, your property’s value, and, most importantly, the requirement to talk to a financial advisor.

    Age Limitations

    When considering a retirement mortgage, it is crucial to keep in mind that age limitations often apply. 

    For instance, some products have minimum age requirements, typically around 55 or 60, while others may have a maximum age cap. 

    Also, be wary of taking out a mortgage with roll-up interest too soon, because if you live for another 30 or 40 years, the accumulated interest on that will be quite substantial.

    Interest Rates and Fees

    Another important factor to weigh before taking out a retirement mortgage is the interest rates and fees associated with the product. 

    Rates can vary significantly between providers and products, with some offering fixed rates while others have variable rates. 

    Additionally, there may be setup fees, valuation fees, and early repayment charges to consider. 

    Shopping around and comparing different offers is essential to ensure you get the best deal possible. 

    Remember that even a small difference in interest rates can significantly impact the total cost of the loan over time.

    Property Value and Equity

    Before diving into a retirement mortgage, it is crucial to assess your property's value and the amount of equity you have built up. 

    The more equity you have, the larger the potential loan or income stream you can access. 

    However, remember that tapping into this equity will reduce the amount left for inheritance or other financial goals. 

    In areas with higher property values, homeowners may have more flexibility in choosing retirement mortgage products that suit their needs while still preserving a portion of their equity.

    Inheritance and Legacy Planning

    When exploring retirement mortgage options, it is vital to consider how your decision may impact your inheritance and legacy planning. 

    Some products offer features like inheritance protection, allowing you to preserve a percentage of your property's value for your beneficiaries. 

    It is worth noting that more providers are incorporating these features due to the growing importance retirees place on leaving a legacy for their loved ones.

    Talk to a Financial Planner

    Finally, before making any decisions about retirement mortgages, consulting with a financial planner or adviser is vital. 

    These professionals can help you navigate the complexities of retirement mortgages, assess your financial situation, and determine the most suitable product for your unique circumstances. 

    It is worth noting that people who receive financial advice are generally better off in retirement compared to those who do not.13

    Engaging with a financial planner can be a valuable investment in securing your financial future.

    How Does a Lifetime Mortgage Affect Benefits?

    If you are considering a lifetime mortgage, it's essential to understand how it may affect your eligibility for means-tested benefits or tax credits. 

    Here are some key points to keep in mind

    Means-Tested Benefits

    A lifetime mortgage may impact your eligibility for means-tested benefits, such as Pension Credit or Council Tax Reduction. 

    The loan amount and interest accrual may be considered part of your income or capital when calculating your entitlement to these benefits. 

    As a result, your benefits may be reduced or even withdrawn entirely.

    The limits for Pension Credit and Council Tax Reduction also vary depending on several factors, including your income, savings, and household circumstances.

    For Pension Credit, the standard minimum guarantee for a single person is £177.10 per week, and for a couple, it's £270.30 per week.14 

    The maximum savings credit amount is £14.04 per week for a single person and £15.71 per week for a couple.

    For Council Tax Reduction, the amount you receive depends on your local authority and its specific rules. 

    However, in general, Council Tax Reduction is calculated based on your income, savings, and household circumstances, and the maximum amount you can receive is up to 100% of your Council Tax liability.

    Both Pension Credit and Council Tax Reduction are means-tested benefits, which means that any additional income, including the loan amount and interest accrual from a lifetime mortgage, may be considered when calculating your entitlement. 

    If your income or savings exceed certain limits, your entitlement to these benefits may be reduced or even withdrawn entirely.

    It's important to discuss your benefits entitlement and the potential impact of a lifetime mortgage on your benefits with a financial adviser or benefits specialist to ensure you make an informed decision.

    Non-means-Tested Benefits

    Non-means-tested benefits, such as State Pension or Winter Fuel Payments, aren’t typically affected by a lifetime mortgage.

    Benefit Caps

    Benefit caps limit the total amount of benefits you can receive, regardless of your actual entitlement. 

    If a lifetime mortgage increases your income or capital, you may be more likely to reach the benefit cap.

    Protected Benefits

    Some benefits, such as Attendance or Disability Living Allowance, are protected and not means-tested. 

    A lifetime mortgage is unlikely to affect your eligibility for these benefits.

    Discussing the potential implications of a lifetime mortgage on your benefits with a financial adviser or a benefits specialist is crucial. 

    They can help you understand your entitlement, assess the potential impact of the mortgage on your benefits, and explore alternative options to achieve your financial goals.

    What Happens to My Retirement Mortgage if I Pass Away?

    If you pass away with an outstanding retirement mortgage, the repayment process will depend on the type of mortgage product you have.

    Lifetime Mortgage

    In the case of a lifetime mortgage, your property is typically sold after your death (or when you move into long-term care), and the proceeds from the sale are used to repay the outstanding loan balance and any accrued interest. 

    Any remaining equity from the sale will be distributed to your beneficiaries according to your will or intestacy rules. Some lifetime mortgages offer an inheritance protection option, which allows you to safeguard a portion of your property's value for your beneficiaries.

    Retirement Interest-Only (RIO) Mortgage

    For an RIO mortgage, the outstanding loan balance, and any unpaid interest must be repaid after your death. 

    Similar to a lifetime mortgage, this is typically done by selling your property. 

    Your beneficiaries will receive the remaining equity after the loan is settled.

    Home Reversion Plan

    With a home reversion plan, the provider already owns a share of your property. 

    Your property is sold upon your death, and the proceeds are divided between the provider and your beneficiaries according to the ownership shares. 

    For example, if you sold 40% of your property to the provider, they would receive 40% of the sale proceeds, and your beneficiaries would receive the remaining 60%.

    Discussing your retirement mortgage plans with your family and beneficiaries is essential, so they know the implications and the process that will follow your passing. 

    Additionally, consulting with a financial advisor can help ensure you select a retirement mortgage product that aligns with your estate planning and inheritance goals.

    Common Questions

    What Happens if I Die Before Paying off My Retirement Mortgage?

    Can I Get a Retirement Mortgage if I Have an Existing Mortgage on My Property?

    What Are the Tax Implications of a Retirement Mortgage?

    What Is the Average Age of Retirement Mortgage Applicants in the UK?

    How Much Can I Borrow With a Retirement Mortgage?

    Can I Pay Off My Retirement Mortgage Early Without Penalty?

    What Happens if I Want to Sell My Home or Move to a New Property?

    Why Consider a Retirement Mortgage?

    What Are The Best Retirement Investments?

    What Is a Retirement Mortgage in the UK?

    How Can I Qualify for a Retirement Mortgage?

    What Are the Benefits of a Retirement Mortgage?

    Are There Risks Involved in Getting a Retirement Mortgage?

    Can I Use Equity Release to Pay Off a Retirement Mortgage?

    In Conclusion

    Retirement mortgages, such as lifetime mortgages, retirement interest-only mortgages, and home reversion plans, can be valuable financial tools for those seeking to supplement their income, access home equity, or fund home improvements during their retirement years. 

    In considering how a retirement mortgage can help you, it’s crucial to understand the potential drawbacks, including reduced inheritance, interest accumulation, and possible impact on benefits, before committing to a retirement mortgage.

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