What are Retirement Interest Only Mortgages?
Retirement Interest Only mortgages (RIOs) are products specifically designed to help those older borrowers who may not be able to get a standard mortgage. They are very similar to interest only mortgages, as you are only repaying the interest on the mortgage, rather than repaying the whole mortgage.
However, there are some major differences between RIOs and standard mortgages. One such of these is that you only repay the mortgage when you sell the house, move into a retirement home, or pass away. While you can get more conventional fixed mortgage terms, this is less common with RIOs. Additionally, rather than proving you can afford all of the mortgage repayments, with most RIOs you only have to prove affordability for the interest. However, some providers also allow you to take out a repayment mortgage instead.
How much can you borrow with Retirement interest only mortgages?
Because each lender has different criteria, the amount you can borrow varies greatly. It also depends on the type of mortgage you take. If you take out a RIO, you are likely to be able to borrow less than with a repayment mortgage. For example, if you are only repaying interest, you may be capped at borrowing 50% of the value of your property. However, if you repay the loan too, you may be able to borrow 65% of the value of your property.
With regards to criteria, there are minimum and maximum loan amounts, minimum and maximum property values, and many more. If you are unsure how how much you could borrow get in touch with an adviser before progressing.
The number of products available to older borrowers has increased greatly. With the increase in lenders, there are far more products available. Generally, minimum property value is around £100,000, with variations around, and with no maximum property value. As well as this, minimum loan value can be as low as £10,000, with a maximum upwards of £1 million.
To find out which lender would be best for your circumstances get in touch with an adviser today.
Can you get a mortgage?
In the past lenders have been reluctant to lend to older borrowers. When looking at an application, lenders take two ages into account. The first of these is the age at the time of application, and the second is the age at the end of the mortgage term.
Due to the stricter affordability checks, it can be more difficult to find finance for older borrowers. But as lenders start to accept that the average working and age we live to is increasing, more offers are becoming available. While some lenders do have maximum age caps on their products, there are also those with no age cap at all.
How to prove income
With older age borrowing, including retirement interest only mortgages, normally the main income will be your pension. So, to prove your income you will have to provide a company pension forecast that has been dated within the last 18 months. You will also have to provide a state pension statement. Additionally, if you are already recieving some level of your pension, you will have to provide a bank statement as well.
It all depends on how close to retirement you are. The criteria are different with different lenders, so get in touch with an adviser to see which lender could work best for you.
Equity Release and Retirement Interest Only mortgages
Equity release mortgages share a lot of similarities with retirement interest only mortgages. Both products allow you to release equity from a property that you already own. However, with equity release you do not pay interest on the mortgage you take out against your home. Instead, this is rolled up and applied at the end of the mortgage. The mortgage normally ends when you sell the property, move into a retirement home, or pass away. Because you are not paying interest on the mortgage, this can lead to you paying more at the end.
For example, you borrow £150,000 on a property worth £300,000, so a 50% loan. There is a yearly interest rate of 5%. In 10 years time you sell the house.
If the interest is compounded monthly, the effective annual interest rate will be 5.116%.
So at the end of the 10 years the total repayment cost will be £247,051.42. This is £97,051.42 of interest over the 10 years.
If you sell the property for the same value, so £300,000, then you will be left with £52,948.76 after the loan has been repaid.
This calculation does not incdude additional fees that may be charged.
However, with a retirement interest only mortgage, you will be repaying the interest monthly. So, with a loan of £150,000, monthly payments will be £625.
After selling the home in 10 years time, you will have paid £75,000 of interest. You will then have to repay the loan, costing £150,000. This brings the total cost of the loan to £225,000.
With the property selling at £300,000, you will be left with £75,000.
This calculation does not include additional fees that may be charged.
If you are unsure about which option would work best for you, contact an adviser today.
Talk to a Promise Money adviser for more details
Pages which others have found useful…