The Private Finance Guide to Later Life Mortgages
Most people recoil at the thought of being burdened with a mortgage during what are supposed to be the golden years of their lives. Recent statistics demonstrating a rise in the number of mortgages being taken out by older individuals, therefore, appear to provide yet another reason for gloom at a time when such reasons are in abundant supply. But this reaction, while understandable, appears to be grounded on a misconception: namely, that mortgages constitute a financial burden from which any sane person would seek escape at the first opportunity. Contrary to conventional wisdom, many older individuals are now finding that, far from limiting their options, later-life mortgages are providing them with the means by which they can maximise their financial freedom, allowing them to live out their final decades in precisely the way they want to. This guide explores the underlying causes driving this increase in demand for later-life mortgages and the options currently open to later-life borrowers.
Types of Later Life Mortgage
The UK has an ageing population and wealth is greatly concentrated in this demographic, especially when we consider property. While property purchases made by older individuals are often entirely cash-financed, an ever-increasing percentage of property purchased and occupied by older borrowers is now being financed by loans. This is in addition to huge amounts of equity being released, as illustrated in recent data by the Equity Release Council, which found that £1.14bn of equity was unlocked by over 55s in the first quarter of 2021, an 7% increase on Q1 of 2020. Moreover, as more baby-boomers enter their pension years, experts are expecting these trends to continue moving in the same direction.
There are a range of factors that have produced this outcome. Demographic trends have been a central driving force: with the baby-boom generation arriving at pension age en masse, demand for pensioner mortgages was always going to rise. But the rise in demand for such mortgages has been far greater than could have been predicted using demographic methods alone, so further explanation is needed to fully explain this phenomenon.
Another contributing factor has been the challenging property market conditions currently being encountered by first-time buyers. Such would-be buyers are finding it extremely difficult to generate a deposit of sufficient size to be able to acquire a mortgage or to be able to buy a property that actually suits their needs. Parents and grandparents are therefore choosing to remove equity from their own properties in order to provide their children and grandchildren with a deposit, giving them the helping hand that they sorely need to climb up onto the first rung of the property ladder.
Other individuals are reaching retirement age and finding that the funds in their pension pot are not sufficient to maintain their lifestyle into retirement. They are therefore removing equity from their properties, where with increasing values they could have a significant amount of money tied up, in order to top-up their pension pots and fund the lifestyle of their golden years.
And then, in addition to these reasons, many other borrowers chose to take out interest-only mortgages earlier in their lives – say, twenty-five years ago – and have now arrived at the end of their mortgage terms with no means of repaying their loan. They therefore have three choices: either they move to a new house that they are able to buy outright; they move to a new house and finance the purchase with a mortgage; or they take out a new mortgage on their existing property. While some people are choosing one of the first two options – the last-time buyer market is growing quite steadily – many others are electing to remortgage their existing properties in order to remain where they are. Thankfully, there are a wide variety of pension mortgage products for which elderly borrowers are eligible, providing individuals in this situation with the opportunity to remain in their family home.
But as demand for later life mortgages increases, so too does the supply of such mortgages, with an increasing number of lenders now throwing their hats into this potentially lucrative ring. As a result, the number of options available to older borrowers is just as large today as it has ever been. But with great variety comes the possibility of great confusion – which is why collecting as much information as possible before making any concrete decisions is now more important than ever.
Although mainstream lenders have traditionally held maximum cut off ages of around 70 years or so, there are now an increasing number of lenders willing to offer standard mortgages to older individuals provided they are able to demonstrate that the mortgage for which they are applying will remain affordable once they have retired or to the end of the term.
In fact, this is even increasingly becoming the case for buy-to-let mortgages too. We have several case studies of this, for example, to secure one of our clients – an 85-year-old landlord – a buy-to-let mortgage for one of her properties. It is still often more difficult in certain respects for older borrowers to obtain certain types of mortgages than it is for their younger counterparts, who have their entire earning lives ahead of them and are therefore able to sail through the affordability tests set by lenders – but there are plenty of lenders that will lend to older individuals. All it takes is knowing who these lenders are, which is where a mortgage broker comes in.
Retirement Interest Only Mortgages
Retirement Interest Only (RIO) mortgages are similar to standard interest only mortgages, but they come with no set end date, and they require no specified repayment vehicle. This is because the mortgage holder retains ownership of the property until they die or are moved to a care home, at which time the property is sold and the loan is repaid in full. Borrowers pay a fixed amount each month – often using their pension income – which is used to cover the interest of the loan. The borrower does not pay anything towards repaying the loan itself until their property is sold.
Lifetime mortgages are similar to RIO mortgages in two main ways: firstly, they allow older homeowners to free up equity in their properties; and secondly, they come with no definite term, instead lasting until the mortgage holder has either passed away or moved into a retirement home, at which time the property is sold and the loan repaid in full. The key difference between RIO and lifetime mortgages is that the latter is more based on a deposit/equity position in a property, you can also choose to service the debt or have no monthly payments. Instead, interest payments can be rolled up into the total loan amount, so that the amount of equity the individual owns in the property gradually decreases throughout the term of the mortgage.
Lifetime mortgages come in two broad types: lump-sum lifetime mortgages and drawdown lifetime mortgages. Lump-sum lifetime mortgages are lifetime mortgages that allow the holder to take out a single, pre-agreed amount of equity from their property at the start of their mortgage term. Beyond this point they are then not permitted to release any additional equity from their property unless terms for such a release are negotiated. Drawdown lifetime mortgages, on the other hand, allow mortgage holders to dip into the equity in their property at any time during their mortgage term, often in the form of a lump sum at the start of the mortgage term and then smaller amounts later. If you take out a draw-down lifetime mortgage, you will only pay interest on the equity you’ve removed from your property, and you can take out as much or as little as you need. This added flexibility has resulted in drawdown lifestyle mortgages being far more popular than either lump-sum lifestyle mortgages or RIO mortgages.
Ready To Take The Next Step
As will be evident by now, the range of products currently available to older borrowers is as great now as it has ever been. Lenders are doing everything they can to adjust to the shifting demographic composition of the country, and these changes are providing options to older borrowers that previously did not exist. But as the variety within the market increases, so too does the complexity; and this added complexity is making it increasingly difficult for older borrowers to navigate the terrain of the market.
No matter your age, there are almost always mortgage options available to you – perhaps more than you may think…
Your home may be repossessed if you do not keep up with monthly payments of your mortgage.