Many homeowners are worried about what happens when they reach retirement and don’t have the money to pay off their mortgage.
Mortgage payers with interest-only loans face the biggest problem.
Over the years an interest only loan will not have reduced in size, but at retirement income drops and means a large chunk of lifetime savings must go towards repaying the debt.
Until recently, someone around 65 years old had limited options if they had to repay a mortgage but did not have enough savings to do so.
The choices were stark:
- Selling the family home and downsizing with the hope enough cash would be left to finance the new purchase
- Handing over retirement savings to pay off the loan
- Borrowing on equity release with all the implications of loved ones losing their inheritance
The result is much the same – still borrow against the home and top the amount needed to repay the existing mortgage from retirement savings.
These options are still there, but as regulators have relaxed mortgage repayment rules in the light of more people reaching retirement and struggling to repay their mortgage.
Later-life lending is the additional alternative.
Later-life lenders, where the market is led by financial giant Legal & General, will offer interest only and repayment mortgages to borrowers rejected by mainstream banks and building societies due to their age.
Loan to value snag
Other lenders active in the market include the Family Building Society offering repayment mortgages with a 30-year term to borrowers over 65 years old, but only 20 years interest only.
Aldermore Bank is keen to lend to anyone aged between 55 and 85 years old, with repayment mortgages up to the age of 99.
The Retirement Interest 55+, known as the RIO, is a specialist deal made through financial advisers which has no fixed term, but must be settled on the death of the last borrower.
Most have a mix of rolled up repayments, interest only or repayment only deals.
The snag is loan-to-value is often limited due to lenders wanting a big margin in the value of the property if borrowers are taking the interest only or rolled up repayment route. Expect an offer of around 60% of the value of a home.