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Retirement Interest Only Mortgages | Explained

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Retirement interest only mortgages, specifically designed for homeowners typically over 55, let you borrow against your property and offer flexible repayment options. This complete guide helps you understand how they work and assists you in deciding if they are suitable for you.

What is a retirement interest only mortgage

A retirement mortgage is very similar to a standard interest only mortgage. However, there are two distinct differences:

1. You only have to prove that you can afford to pay the monthly interest payments

2. The mortgage continues and you or your estate usually pays it off when you pass away or enter full-time care.

Some lenders consider it risky to lend to individuals in their later years. Opting for a retirement mortgage might be a sensible choice if you find it challenging to secure a standard mortgage.

Mortgage Quotes

Always remember: Your home may be repossessed if you do not keep up repayments on your mortgage.

The pros and cons of retirement interest only mortgages

  • Lower monthly payments: as you pay only the interest each month, your payments can be significantly lower than those of a traditional repayment mortgage.
  • Stay in your home: RIOs can provide a way to stay in your home and not downsize, as you won’t need to repay the loan until you sell the property, move into long-term care, or pass away.
  • No end date: unlike a standard interest-only mortgage, an RIO doesn’t have a set end date, which for some gives peace of mind and security in retirement.
  • Equity release: If you’ve built up equity in your home, a RIO can unlock some of this without you having to sell your home.

Other considerations

  • Borrowing ability: this is based on your retirement income so could be less than you’d anticipated.
  • Affordability checks: you will be subject to mortgage affordability checks to ensure you can afford a retirement interest only mortgage.
  • Potential of reduced inheritance: repaying the loan from the sale of your property when you pass away or move into care might reduce the inheritance you can leave for your loved ones..
  • Repayment risk: as with a loan your home is at risk if you do not keep up your mortgage payments.

It’s really important to consider the above carefully and we would always advice you to seek advice from an independent financial adviser. They can help assess whether this option aligns with your financial situation and retirement goals.

Mortgage Quotes

Always remember: Your home may be repossessed if you do not keep up repayments on your mortgage.

Equity release

Equity release offers an alternative financial arrangement for homeowners, typically aged 55 and over. It is a means of accessing the equity tied up in their home.

Equity is the portion of the property that you own outright, calculated as the current value of your home less any outstanding mortgage or other debt secured against it.

Types of equity release:

If you’re eyeing a financial top-up using the value of your home, equity release might be worth a look. It comes in two main flavours: lifetime mortgages and home reversion. Both choices have big impacts, so it’s important to get them right. Let’s break down how each one works.

Lifetime mortgage

A lifetime mortgage is when you borrow against a portion of your home’s value. Interest accrues on this amount, but you don’t have to make any repayments while you’re alive.

In contrast, a retirement interest-only mortgage requires you to pay back the interest monthly, helping reduce the overall debt. Both loans are repaid when you sell your home, move into long-term care, or pass away.

Home reversion

This is where you sell part or all of your home to a company in return for a lump sum or regular payments.

You continue to live in your home rent-free until you pass away or move into long-term care, but you have to agree to maintain and insure it.

At the end of the plan, your home is sold, and the proceeds are shared according to the remaining proportions of ownership.

You should not take any of these decisions lightly and must be clear on the long-term implications. We highly recommend seeking advice from a financial adviser to ensure any decision aligns with your personal circumstances.

Find Your Mortgage

Always remember: Your home may be repossessed if you do not keep up repayments on your mortgage.

Are retirement interest only mortgages right for you?

Always consider your long-term plans and best and worst-case scenario.

This is not a one-size-fits-all scenario. For some homeowners, the benefits of extra financial freedom and staying in their homes outweigh the risks. But for others, actually downsizing and moving home might be more appropriate.

Before making any firm decision, seek advice from an independent mortgage advisor who can look at your specific circumstances. They can help you determine what type of retirement mortgage is most suited.

Always remember: Your home may be repossessed if you do not keep up repayments on your mortgage.

You may have to pay an early repayment charge to your existing lender if you remortgage.

Individual savings may vary, your savings will depend on personal circumstances.

Last Updated: November 13th, 2023

Phil Spencer

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