The popularity of endowment mortgages, which were frequently sold to people who made no provision to repay them with a savings product has meant that many people enter retirement with a mortgage still to pay.
This is a nightmare for those involved, but it is also awkward for lenders, who do not want to be responsible for putting elderly people out of their homes. As a result, the mortgage industry has come up with a solution.
At Continuum, we look at the positives and the negatives of retirement interest-only mortgages.
A new solution to a growing need
Last year the financial watchdog changed its own rules to allow thousands of retired borrowers to remortgage onto interest-only deals without needing a repayment plan in place.
Instead, they will be able to use the sale of their home on death or moving out into full-time care to repay the balance.
Known as retirement interest-only mortgages, these deals are aimed at homeowners who have failed to clear their mortgage debt before retirement rolled round. They can also provide substantial funding for those who would like to cash in on their home’s value to help fund their pension years.
How it works
Official estimates suggest there are tens of thousands of pensioners with no plan for how to repay their existing interest-only mortgages.
At the same time, the value of those properties may have shot up. Retirement interest-only mortgages are designed to provide the answer, with a mortgage loan secured on the property that will remain interest only.
This means there is no repayment term – the loan just keeps going with the homeowner.
In some cases, rates will be flexible, meaning that a deal that is very affordable now could start to become a problem if interest rates were to go up dramatically from their current historic lows – but a lifeline is a lifeline, and if it means saving a home you love, you may be very keen to grasp it.
It is a good deal for the lender, who can count on interest payments coming in for years to come, and for the borrower, who can count on keeping a roof over their head in the home they love.
The pluses and minuses
Anyone who finds themselves in the position of having a mortgage that they can never hope to repay from their pension could be very interested in this type of deal.
But with these loans the fixed rate period, however long, is limited, which might leave you at the mercy of much higher rates when the current introductory period comes to an end.
This would mean you could need to budget to pay rather more, but if the rate is fixed for life, it means you’ll have certainty over your outgoings for as long as you are in a position to make them. What’s more, this type of arrangement can effectively insulate you from the wider economy. Whatever happens to interest rates will never again make a difference to your mortgage repayments – and with mortgage rates now at near-historic lows it might make sense to fix forever.
If you were to take the deal at 55 and live to 100, you would effectively be taking out a 45-year fixed-rate mortgage.
Of course, as recent events have proved, there is no predicting the future. If interest rates rise, you will be saving money by continuing to pay your fixed rate. If things went the other way, and rates dropped you might be paying more than you needed. But with the current bank of England base rate of just 0.1% it is hard to see that there is much room for rates to fall at all.
Finding out more
If you are approaching retirement with a large mortgage still to pay off, or want a cost effective way to release equity from your home, a fixed for life retirement mortgage could provide the answer you need.
These are specialised products, and to get the deal that is most suitable for you, expert help is essential. At Continuum, we can help you find the solution that will take into account your income in retirement, affordability and the level of equity in your home – and keep the monthly cost to a minimum.
Call us now for the help you need.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to a suitable mortgage product, you should seek independent financial advice before embarking on any course of action.
Your home may be repossessed if you do not keep up repayments on your mortgage.
A Retirement Interest Only mortgage is a loan secured on your property.
You may have to pay an early repayment charge to your existing lender if you re-mortgage.
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