Later life mortgages
Borrowing options for older homeowners
Until recently, equity release was one of the only options available to homeowners over the age of 55 wanting to make the most of the cash tied up in the value of their home, but there’s now a lot more on offer.
In this article, I’ll take you through several later life mortgages, including lifetime mortgages and some others you may not be aware of, to give you a better sense of what’s out there.
Does your age affect your later life mortgage options?
Technically there’s no cut off for taking out a mortgage. However most lenders impose an upper age limit on new mortgage applications (typically around 65) and often insist the mortgage term ends somewhere between the ages of 70 and 85.
The reality is the older you are, the harder and less flexible it is to take out or extend a mortgage. This is simply because, from the lender’s perspective, there’s a higher risk that you won’t be able to pay them back. As you inch closer to retirement, the more likely it is that your income will drop, not be as steady or both, and the more likely you are to have health issues – all of which may prevent you from paying off the mortgage in full.
The good news is that as life expectancy continues to rise, mortgages lenders are adapting to the needs of older borrowers looking for options that help them achieve their retirement goals and continue living in their own homes for longer.
Why more people are turning to later life mortgages
- With rising life expectancy and the baby boomer generation hitting old age, our aging population is growing rapidly. According to the ONS, the number of people in the UK aged 55 and over will grow to 23.7 million by 2030. That’s a significant chunk of the population!
- Living longer and in better health means more people over retirement age are continuing to work, staying active and enjoying financial independence than ever before.
- The huge rise in house prices over the past few decades has created unprecedented property wealth amongst older homeowners, particularly those nearing retirement.
- New pension freedoms have given over 55s more control over their retirement savings, and increased demand for products that allow borrowers to access their pension funds and leverage their property wealth.
- Having peaked in the 1990s, many interest-only mortgage terms are coming to an end, leaving borrowers with the challenge of repaying the capital without the benefit of a salary.
Equity release – the original ‘later life’ mortgage
Equity release allows you to access funds tied up in the value of your home. While there’s a lot more choice these days, equity release lifetime mortgages are still popular with homeowners over 55, thanks to a raft of consumer protections and regulation by the Financial Conduct Authority. With a lifetime mortgage you can either take all the cash in one go or keep some in a drawdown facility and take what you need as and when you need it.
As David Burrowes, Chair of the Equity Release Council explains:
“New customers of plans that meet our high consumer standards can use voluntary repayments to keep their costs in check while existing customers are free to take extra instalments of money as they need it, safe in the knowledge their previous borrowing is fully insulated from rate rises.
Looking ahead, we must be wholly committed as an industry to putting equity release in its proper context as one of a range of later life lending options and putting property wealth in its proper context at the heart of every retirement planning conversation.”
What other mortgages are available in later life?
You may still be eligible for a standard mortgage, but this will depend on your age and financial situation when you apply. There are several options under this umbrella, including:
- Fixed-rate mortgages – where the interest rate you pay is fixed for a set period no matter how much interest rates fluctuate. This means you’ll always know what you'll be paying. However, fixed rate mortgage rates tend to be slightly higher because of this and if interest rates fall during your fixed period, your fixed rate might end up being higher.
- Variable rate mortgages – where the interest rate you pay moves up or down according to the lender’s standard variable rate, which usually tracks the Bank of England's base rate. When a fixed, tracker, or discount mortgage term comes to an end, it usually rolls onto the standard variable rate.
- Tracker mortgages – where the interest rate you pay follows (or ‘tracks’) the Bank of England base rate and is usually a bit higher than the BBR. Like a variable rate mortgage, the interest you pay might go up or down. Some tracker mortgages have a cap on how high your interest rate can climb.
- Discounted mortgage – where the interest rate you pay is set at a notch below the lender's standard variable rate for a set period. These mortgages fall under the category of variable rate mortgages, meaning your payments can fluctuate, up or down.
- Capped mortgage – where the maximum interest rate you pay is capped. Even though capped mortgage interest rates typically run higher than tracker or discount mortgages, they can offer peace of mind because your monthly payments will never go over a set limit.
- Offset mortgage – where you use your savings to cut (or ‘offset’) the interest payable on your mortgage. So, if your mortgage is £100,000, and you've got savings of £15,000 with the same bank or building society, you'll only pay interest on £85,000. This allows you to either shrink your monthly payments or shorten the time it takes you to pay off your mortgage.
Retirement interest-only (RIO) mortgage
Like a lifetime mortgage, a retirement interest-only mortgage is only available to homeowners over the age of 55. With this type of mortgage, you only pay the interest on the loan not the capital, keeping your monthly repayments lower at a time when your income may be lower or less regular than it was.
The capital is typically repaid from the proceeds of selling your home, either after you move out, go into care or pass away.
Hybrid lifetime mortgage
A more recent addition to the later life mortgage scene, hybrid mortgages start as a standard fixed-rate mortgage with simple interest, before transitioning into a lifetime mortgage with compound interest. The benefit is that you can make repayments while it’s a standard mortgage, reducing the loan, and don’t have to make repayments once it becomes a lifetime mortgage.
As the name suggests, you apply for this type of mortgage with a guarantor who will have to take over your repayments if you’re unable to pay them. This might enable you to take out a mortgage or remortgage you wouldn’t otherwise qualify for, but it does risk putting a strain on your relationship with your guarantor if you were unable to pay further down the line.
A Joint Mortgage Sole Owner (JMSO) mortgage could enable your adult children or a younger relative to support you financially, so you can stay in your home for longer. However, as with a guarantor mortgage, they’ll have no choice but to cover your repayments if you were ever unable to do so.
Older People’s Shared Ownership scheme (OPSO)
Restricted to the over 55s, this government-backed scheme allows you to purchase between 10% and 75% of a property and then pay a subsidised rent on the rest.
Seek advice from an expert
As you can see, there are a lot of options to choose from and a lot to weigh up, so always seek advice from a suitably qualified financial adviser before deciding what to do.
If you’d like to understand more about later life mortgages, call 0800 133 7380 to speak to leading retirement specialists Age Partnership. Their expert advisers can explain the options available to you and compare many leading lenders free of charge.
Or, to see how much equity you could release from your home, use our free and easy to use calculator.
Try our equity release calculator