I think you’ll agree with me when I say…
Retirement typically sparks visions of fun times like golfing, vacationing and playing with your grand kids. However, with minimal pension rates and the ever-rising economy, how do you go about actualizing your dreams?
Well, as per a 2018 survey by a Securian Financial Group, 57% of retirees after discovering the incredible equity release1 and retirement interest-only mortgages2 are now able to enjoy their retirement through supplementing their pensions with these fantastic schemes as compared to the 30% in both 2008 and 2012 when the same survey was taken.
Therefore, if you want to be in the 57% of homeowners soaking in the sun in Spain and Bali, actualizing their long-life dreams, and making the home improvements they’ve been dying to work on, check out this guide and get to understand the workings and benefits of taking out a retirement interest-only mortgage.
If you need more information on though, be sure to check the guide on ‘What is a Lifetime Mortgage.’
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Let’s Begin With the Basics
The world of financial products is ever-changing,and new products keep coming up on a daily. However, even with these new products cropping up, there are still limited options for older people wanting to continue accessing mortgages into retirement.
While most lenders have relaxed their upper age limits for traditional mortgages,1 there are still many limitations.
For example, you must be able to prove that you can make monthly mortgage repayments in retirement, meaning you have to pass your provider’s credit, income and ‘affordability’.
Substantiating income in retirement can be challenging,and this is where the hurdles to retirement lending arise. P60’s,2 projections, state pension letters, and investment and pensions statements are commonplace necessities for retirement lending.
In response to these restricted borrowing opportunities for homeowners aged 55 and above, the financial services watchdog – the Financial Conduct Authority (FCA3 ) decided to help you out by relaxing its regulations enabling you to repay your mortgages when the last homeowner dies or goes into long-term care (an element that resembles that of equity release program).
What is a Retirement Interest-Only Mortgage?
In 2018, the FCA sanctioned retirement interest-only mortgages. Since then, RIO’s have become the fourth form of later life mortgage accessible to proprietors over the age of 55.
A retirement interest-only mortgage (RIO) is practically the same as the standard interest-only mortgage with only two or three differences.
- You repay the loan upon your death or when you decide to move into permanent care
- Unlike the interest-only mortgage, with the RIO, you only have to prove you can afford the monthly interest repayments
RIO’s have no minimum age requirement;however, they are generally designed for older borrowers, those who are over 55, over 60 and pensioners who would prefer to apply for the retirement interest-only mortgages than a typical interest-only mortgage.
They’re also similar to some types of equity release, where you pay-off the initial amount and probably any interest when you breathe your last or move into long-term care.
The only notable difference is that with a lifetime mortgage, you will either:
- have a more substantial amount to repay at the end because there are no monthly repayments and the interest is compounded and added to the overall loan value, or
- You can opt to make monthly interest payments and ad-hoc capital repayments during the term of the mortgage. Choosing this option helps you reduce or halt the effect of interest roll-up, but it comes with higher monthly repayments.
However, when it comes to a retirement interest-only mortgage, you will only have to pay off the interest every month, so your monthly repayments will be lower.
It then means that unlike with other products, with the RIO mortgage, you’ll be more likely to have something to offer as an inheritance or pay for long-term care.
The Benefits of Retirement Interest-Only Mortgages
Like all other later life mortgages, RIO’s have their perks which include but are not limited to:
- They have interest rates that are typically low which are the most sorted out type of equity release
- With RIO’s you don’t need advice (even though it’s recommended)
- You have the capability and the potential to borrow more
- You have the right to repay your mortgage early (though you may also have to pay a hefty early repayment charges depending on your plans – there are others where this can be avoided4 )
- You don’t have to worry as your family will more likely have more substantial amount than when you would have opted for an equity release program.
- You don’t have to bother as your family will more likely have more substantial amount than when you’d have opted for an equity release plans
The Pitfalls of Retirement Interest-Only Mortgages
Just as other mortgage products have their perks, they also have some drawbacks,and the RIO’s are no different. Here are some of the pitfalls of taking out a retirement interest-only mortgage:
- If you have an existing mortgage, you have to make sure that you repay it first before embarking on any other plans
- It requires you to pass the mortgage lenders’ income and affordability checks
- You have to ensure that you make the required monthly interest repayments
- Your interest rate can either be fixed for the short term or go up (or down) in the future
- The mortgage will have to be renewed at the end of the original interest-rate period – probablysustaining new feeslinked with taking out a mortgage.
- Your provider will ultimately sell your home, impacting the amount of your inheritance, though not with the same intensity as an equity release scheme
Retirement doesn’t have to mark the end of your glory days. It should mark the beginning of a new chapter in your life and what better way to do so than by taking a retirement interest-only mortgage to help you maintain your lifestyle while also allowing you to enjoy the perks that life has to offer?
Well, deciding on which is suitable for you can be a complicated process, and that said you would have to seek guidance from a professional.
So, if you need to learn more about this and what suits your needs best, be sure to click here and see how much equity5 you can release and also chat with an expert for free.
How much money could you release?
A lifetime mortgage plan allows you to access the value of your home, tax-free without having to sell up, so that you can have money to spend on whatever you want or need.