Top 10 Mortgage Lenders For Older Borrowers
Looking for greater flexibility with your mortgage options?
Mortgages for older people can transform your retirement with financial security.
We explain the different options, what's important to consider and the best later life mortgages available.
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Securing mortgages can seem more difficult for older borrowers, due to lender restrictions on retirement income and age limits.
There is a wide range of flexible later life mortgages available providing greater financial freedom into retirement.
We explore how to secure a mortgage for older borrowers and compare the top lenders.
Author Paul Murphy -Later Life Finance Ltd
Mortgages for older borrowers
Mortgages for older borrowers consist of three main types:
- Retirement Interest only mortgages
- Lifetime mortgages (Lump sum or drawdown)
- Interest only lifetime mortgages
Later life mortgages have become increasingly popular among homeowners aged 55 and over.
They offer a way to access funds tied up in property without the burden of monthly repayments, although payments can still be made on a voluntary basis to avoid compound interest accruing.
But before diving in, it’s crucial to understand how mortgages for older borrowers work, the interest rates, and how the plans can be arranged to suit your individual requirements for longer term flexibility and security in your home for the years to come.
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Retirement Interest-Only Mortgages
With a Retirement interest-only mortgage (also known as RIO) the interest is paid off monthly, and the full amount of the loan is to be settled upon the death of the borrower or when they vacate the property.
This type of later life lending product differs from lifetime mortgages, as retirement mortgages involve fixed monthly payments, whereas lifetime mortgages do not.
RIO mortgages can raise up to 60% of the value of your home based on your income, whereas a lifetime mortgage is based on your age.
To qualify for a retirement mortgage, an income assessment is required, consisting of employed or self-employed income, pensions, and investment income.
There is a risk of default if the repayments of the retirement mortgage are not met, and unlike a lifetime mortgage, RIO’s are not protected by the Equity Release Council codes of conduct.
Equity Release Mortgages
Equity release is a financial product that enables individuals to unlock tax-free cash from the equity in their property for any lawful purpose.
It can be especially beneficial for retirees looking to settle an interest-only mortgage, aid family members in purchasing a property, or make home renovations to improve their quality of life.
There are two primary types of equity release products: home reversion plans and lifetime mortgages.
One of the key advantages of equity release is the negative equity guarantee, which ensures that you will never leave a debt to your estate in the event of negative equity arising from the mortgage.
This provides peace of mind and financial security to you and your loved ones.
Additionally, voluntary repayments can be made to maximise the inheritance you can leave for your beneficiaries and prevent compound interest from accruing.
Lifetime Mortgages Explained
Lifetime Mortgage lenders use actuarial calculations to estimate your life expectancy, and as a result, they offer larger release amounts to older borrowers.
The value of your property is a significant factor; the higher the value of your home, the more you can borrow. However, lenders usually cap the maximum percentage of the property’s value that they will lend. This is to ensure there is sufficient equity remaining in the property to cover any interest that accrues over time. Houses and flats have different rules, with houses generally having a higher loan to value than flats.
Loan-to-Value (LTV) Ratio: Lenders use the loan-to-value ratio to determine the percentage of your property’s value that they are willing to lend. The LTV ratio varies between providers, but it typically ranges from around 20% to 50%. Some lenders may offer higher LTV ratios for older borrowers.
Health and Lifestyle: Some lifetime mortgage providers offer enhanced borrowing options for individuals with certain health conditions or lifestyle factors. These factors may affect your life expectancy and can influence the loan amount.
Interest Rates: The interest rate applied to your lifetime mortgage will affect how much you will repay. Higher interest rates usually result in larger loan amounts.
Inheritance Protection: If you choose to protect a portion of your property’s value as an inheritance for your beneficiaries, the amount you can borrow will be reduced, to ring fence the percentage you wish to protect.
Provider’s Criteria: Each lender has its own underwriting criteria and eligibility requirements. Different lenders have varying loan amounts and criteria.
It’s important to note that with a lifetime mortgage, the loan amount, along with the accumulated interest, is repaid when you pass away or move into long-term care.
Therefore, before considering a lifetime mortgage, it’s crucial to seek independent equity release advice and carefully consider the impact on your estate and inheritance for your beneficiaries.
Additionally, consider alternative options like downsizing or other forms of equity release to determine the best solution for your financial needs.
Interest Only lifetime mortgages
An interest only lifetime mortgage enables monthly interest repayments on a voluntary basis.
This means you don’t need to prove your income to qualify.
To be eligible, you need to be over 55 years old, have little or no mortgage left to pay, and own a property in good condition that is also your main residence.
Most lifetime mortgage schemes come with a negative equity guarantee, ensuring that the debt will never exceed the value of your home. This comes under the equity release council codes of conduct protection for homeowners.
What's The Difference Between A Lifetime Mortgage and Equity Release?
Yes, early repayment of a lifetime mortgage is possible, but keep in mind that you may be charged fees depending on the provider and plan. It’s essential to understand any potential early repayment fees before proceeding with a lifetime mortgage.
Now, let’s discuss interest rates, the concept of accrued compound interest, and the average interest rate.
How much do you pay back with a lifetime mortgage?
Compound interest means the sum borrowed will accumulate over time and cause the sum borrowed to double in around 10 years.
Due to this effect, voluntary interest repayments are popular with homeowners looking to unlock their equity without having to lose it all to effects of compound interest accruing.
For example, if the interest is repaid on a lifetime mortgage each month, this will stop any compound interest being applied to the mortgage meaning they can be run in a similar fashion to an interest only mortgage.
Since the repayments are voluntary, there is no risk of default with a lifetime mortgage, making the plans much safer in retirement years for homeowners.
For example, in a joint ownership structure, if one homeowner passes away the survivor could opt to stop or reduce the voluntary repayments when their income reduces as a result of losing their partner.
The flexibility makes the lifetime mortgage a safe and acceptable solution to consider when raising cash from your home.
Lifetime mortgage interest rates
Interest rates for equity release lifetime mortgage schemes vary, with current average rates around 6%. The interest rate you’ll receive depends on several factors, such as the amount you want to borrow and the type of plan you choose. Other factors like your age, property value, and loan-to-value ratio also come into play when determining the interest rate.
With that in mind, let’s explore the factors affecting lifetime mortgage rates.
Types of Lifetime Mortgages
Different types of lifetime mortgages offer varying interest rates and repayment options, such as lump sum, drawdown, and interest-only mortgages. Understanding these types can help you choose the best option for your needs.
Let’s explore each type in more detail.
Lump Sum Lifetime Mortgages
Lump sum lifetime mortgages provide a single payment, with interest accruing over time if you do not make any voluntary repayments to the plan.
This type of mortgage allows you to access a large sum of money at once, based on your age and the property value.
Our expert advisers will also consider whether a drawdown lifetime mortgage may be more suitable.
Drawdown Lifetime Mortgages
Drawdown lifetime mortgages offer more flexibility, allowing borrowers to access funds as needed, with interest only charged on withdrawn amounts. This type of mortgage can be an attractive option for those who want to access funds gradually while minimising interest charges.
The funds in the drawdown (or reserve facility) are charged at the prevailing interest rate at the time of borrowing, which makes this option an efficient route compared with taking the funds in one lump sum.
Interest only lifetime mortgage
Interest-only lifetime mortgages require monthly interest payments, keeping the loan balance constant.
This type of mortgage can help homeowners protect a larger portion of their property for inheritance or maintain a steady loan balance.
The advantage of an interest only lifetime mortgage is the payments are voluntary and can be rolled up, which protects homeowners from defaulting on the mortgage in the event payments were stopped for any reason. This can be beneficial in the event of either spouse passing away or going into long term care, and protects the surviving homeowner.
Consider whether making monthly interest payments aligns with your financial goals and capabilities.
Should I take a lump sum or a drawdown plan?
The decision between a lump sum or drawdown lifetime mortgage should be based on your specific needs and requirements.
Opting for a drawdown lifetime mortgage can offer certain advantages, which include:
Interest is applied only to the amount withdrawn, rather than the entire approved loan. This can potentially save you money on interest charges.
Drawdown allows you to plan and budget for specific projects and your retirement more effectively, as you have the flexibility to access funds as needed.
By choosing a drawdown lifetime mortgage, you may be able to maintain eligibility for means-tested benefits, as you have control over the amount and timing of the withdrawals.
Ultimately, it is important to carefully consider your individual circumstances and seek professional advice to determine which option, lump sum or drawdown, aligns best with your financial goals and requirements.
Summary
There are many factors to discuss when considering whether a mortgage for older borrower is suitable for your plans.
Various aspects of equity release, including the option to transfer a lifetime mortgage to a new property, the protection against negative equity, considerations for early repayment, and the choice between a lump sum or drawdown lifetime mortgage are all important factors to consider when exploring equity release.
Later Life Finance provide a comprehensive review of all your equity release options. Our expert advisers provide detailed illustrations and projections to assist you with understanding the effect of raising money from your home on your estate.
We provide professional insight into how to manage the optional interest payments, and how this will affect your estate in comparison with making no payments.
