While the Bank of England recently announced plans to scrap mortgage affordability assessments, getting a traditional mortgage can still be problematic in our later years. This is because many conventional mortgage lenders still maintain relatively tight lending criteria and affordability checks, especially in later life. In our later years, income may be limited and regular repayments challenging to maintain. However, this has created a subsector, retirement mortgages, focused on older borrowers who often have significant equity in their property.
What are the mortgage options in later life?
In theory, it is illegal to restrict access to a particular service or product based upon age. But thankfully, common sense still prevails in the mortgage industry, with decisions based purely on an individual's ability to make monthly payments. So even though the Bank of England will be removing mortgage affordability tests in August 2022, there are still rules and regulations to protect lenders and borrowers. While lifting these restrictions may not necessarily assist you if you're in later life with a reduced income, there are other perfectly viable options.
Remortgage to release equity
One of the traditional ways to release equity is via remortgaging. For example, you may have an outstanding mortgage of £20,000 on a £100,000 property. Dependent on circumstances, it may be possible to remortgage for £50,000, pay off the outstanding £20,000 mortgage, and retain the balance as equity release. However, this type of mortgage will require a certain income level to fulfil monthly repayments.
As many older homeowners consider extending their working life, a growing number will have secure income well into their later years. While some mortgage providers have unofficial age restrictions, traditionally between 65 and 70, on occasion, this can be extended where there is long-term regular income. However, even though many older homeowners work well into their traditional retirement years, access to mainstream remortgages can be difficult.
Traditional interest-only mortgages are now a thing of the past for many people. Often sold in tandem with endowments, many of which failed to meet their redemption targets, this caused severe problems for many people. Consequently, obtaining an interest-only mortgage is more challenging unless you have a secure income and a guaranteed lump sum to repay the capital at the end of the mortgage term.
As we will cover in a moment, this type of mortgage has morphed into a specialist retirement mortgage known as a lifetime mortgage. So, while still accessible to some people, on the whole, traditional interest-only mortgages are reasonably rare.
Specialist retirement mortgages
It is interesting to note that as many of us extend our working lives, you may have sufficient income to cover mortgage repayments when seeking to release equity. The industry has adapted to this changing environment to a certain extent. However, there can still be hurdles when accessing traditional mortgage funding after 50. This brings us to alternatives such as lifetime mortgages and home reversion plans.
In recent years we have seen a massive increase in the number of older homeowners looking toward lifetime mortgages as a means of releasing equity. These are mortgages structured around the needs of those in or approaching retirement. There are several factors to take into consideration.
In a day and age where taxes are rising, many will be pleased to learn that funds raised via a lifetime mortgage are tax-free. In addition, while many prefer to take a one-off payment, you can stagger payments over time, giving you a regular income. One of the other benefits of periodic payments is that you only pay interest on the funds you draw down, reducing interest payments in the future.
There is also the option to restructure or adjust your lifetime mortgage. For example, if you have 100% equity in your property and take a lifetime mortgage for 20%, there is the option to take further lump-sum payments in the future. If raising capital to pay off an existing mortgage, you may need to consider an early repayment charge, depending on the terms of your current mortgage. Alternatively, you may be looking to repay a personal loan or credit card.
While the gap between traditional remortgage and lifetime mortgage interest rates has narrowed, you should expect a higher interest rate with a lifetime mortgage. One of the main factors influencing this is the uncertainty regarding the duration of the arrangement. For example, a homeowner could move into long-term care or pass away at any time within the next year, 20, 30 or even 40 years.
Loan to Value (LTV) ratio
To maintain a gap between an outstanding lifetime mortgage and the property value, a typical LTV ratio is between 20% and 60% of your home. Even towards the upper end of the range, this leaves more than enough headroom to allow for a potential fall in property prices. Of course, the figure will depend on your age; the older you are, the higher the LTV. This is because you will have fewer payments to roll up, less interest, and interest on interest. The lifetime mortgage company will also, in theory, receive their capital back relatively quickly.
For example, in the lower age range, 55 to 65, you would typically be able to extract between 25% and 35% of your equity. Anywhere above 65, you could potentially take out 60% of your property's equity value. Whether going through a building society, high street bank or specialist mortgage provider, it is essential that you take professional advice. They will be able to advise you on affordability and the annual percentage rate of charge (APRC). This is an extension of the APR but also considers fees to the end date of your mortgage.
No monthly repayments
While particularly useful when the Bank of England introduced mandatory mortgage affordability tests, they are still a big attraction. Whatever level of equity you release, there are no monthly interest payments. This includes interest and capital - although there is the option to contribute if you wish.
Instead of making regular capital and interest repayments, interest payments will be rolled over and added to your outstanding loan amount. On a side note, this does introduce a degree of interest on interest which can eat into house sale proceeds at the end. When you move into long-term care or die, your home is sold, the outstanding lifetime mortgage is repaid, and the remaining funds go to your estate.
No negative equity, guaranteed
In the early days of lifetime mortgages, a relatively small number of people found themselves in negative equity due to the impact of interest on interest, no capital repayments during the term and house price movements. Consequently, many lifetime mortgage providers introduced a no negative equity guarantee, which meant that you would never repay more than the value of your home. This may have been prompted by the FCA announcing it would be taking a closer look at negative equity and other potentially unforeseen scenarios.
Historically, UK house prices have been one of the better-performing assets. Still, past performance is no guarantee of future price changes.
Remain in your home
Whether you remortgage 10% or 60% of your property, you will have the right to stay in your home until you move into full-time care or pass away. This is a significant issue for many people who struggle for funds in later life but also prefer to remain in their long-term homes. Incidentally, you may still be able to move home while retaining your lifetime mortgage. However, you must agree to this with your lifetime mortgage provider.
While many people seek to leave their home and other assets to their children, if you were to take out a lifetime mortgage, this could significantly reduce your estate. In the event of your death, the property would be sold; proceeds used to pay off the capital and interest on the lifetime mortgage, with the remaining balance going to your estate.
Early repayment of lifetime mortgage
If your financial situation was to change and you were in a position to repay your lifetime mortgage, there may be an early repayment charge. This is because your mortgage's interest rate and terms would have been calculated on an average duration forecast. While not necessarily a substantial financial burden, it is something to be aware of if you consider potential early repayment.
There is a possible drawback regarding means-tested benefits if you withdraw equity from your home. Even though your net financial position will be unchanged - cash in the bank but a comparable debt - this may impact your eligibility for various means-tested state benefits.
As you can see, there are various pros and cons regarding lifetime mortgages, which you need to discuss with your financial adviser or mortgage broker.
Home reversion schemes
Home reversion schemes have been around for some time but only recently came under the regulatory umbrella of the FCA. While they are more straightforward in theory, there are several consequences in practice. So how does a home reversion scheme work?
A third party will acquire a share in your property in exchange for a lump-sum payment. They will retain this share in your property until you either move into long-term care or pass away. Then the property will be sold, with the investor receiving their percentage of the proceeds. The balance will go into your estate. There are several pros and cons with home reversion schemes.
Relatively quick settlement
|Potential loss of eligibility for state benefits|
|No monthly repayments||Potential restrictions if looking to move home|
|Live rent-free until the property is sold||Investor will only pay between 20% and 60% of the market value|
|No capital gains tax liability if the property is your primary residence||Legal obligation to maintain the property in good repair at your expense|
The discount to the market value paid by an investor should, at the very least, prompt you to take advice. The rate will depend upon your circumstances, but an example would be as follows:-
Value of your property: £100,000
Equity content: £100,000
Percentage of property sold: 50%
Market value: £50,000
Investor payment: £30,000 (60% of market value)
Upon payment of the funds, in exchange for a 50% equity share, the value would immediately be uplifted to £50,000. In theory, this gives you an instant £20,000 gain. If the property doubled in value before it was sold, it would be valued at £200,000, with the investment company share valued at £100,000. A 400% gain on the initial £20,000 investment, even though the property had only increased by 100%.
While we may see the discount to market value narrow as the sector becomes more competitive, it is crucial to recognise that there are no repayments with a home reversion scheme. You will also live rent-free. If you were to take out a home reversion scheme aged 55, you could conceivably live rent-free for over 40 years. You would also benefit from the long-term uplift in the property's value. However, this would be on your reduced level of ownership.
If we look at this from an investor's point of view, their funds could be tied up for decades. They would need to wait until you moved into full-time care or passed away and the property was sold.
While a home reversion scheme is relatively straightforward, there are issues to consider. While you may not have the same financial obligations as a residential or lifetime mortgage holder, for many, the market value discount could prompt them to look elsewhere.
Are retirement mortgages widely available?
There is no doubt that the UK population is ageing, this being more prominent in Scotland than anywhere else in the country. Even though many of us extend our working life to maintain living and lifestyle expenses, equity release is becoming more popular. Many of those approaching retirement today will have benefited from the considerable increase in property prices over recent years, leaving untapped riches in their home. We often end up with reduced employment income in later years, reducing eligibility for more traditional remortgage arrangements.
Consequently, many of us are now looking toward lifetime mortgages or even home reversion schemes to ensure we have adequate funds to enjoy later life. As competition in the sector increases, the gap between standard and lifetime mortgage rates is falling. There is also a softening in the discount rate between market value and investor payments regarding home reversion schemes. However, there are also other issues to take into account which do support this seemingly unfair discount.
Are retirement mortgages regulated?
As the retirement mortgage market grew, with increasing demand for both lifetime mortgages and home reversion plans, it was evident that regulations needed tightening. Initially, until just recently, home reversion plans did not come under the remit of the Financial Conduct Authority (FCA). Thankfully this has changed, and both lifetime mortgages and home reversion schemes now come under the FCA umbrella.
This means that if clients lose out due to fraud or mis-selling by FCA authorised companies, they may be eligible for compensation. The fact that companies now need to be regulated has seen many participants remove themselves from the marketplace. Considering that these types of mortgages will likely be the final substantial financial decision of many of our lives, they must be regulated and consumers protected.
The Prudential Regulation Authority (PRA) is also involved in regulation, ensuring the financial stability of individual organisations and the entire sector. There is a financial services register on the FCA website - make sure you use it to check an adviser's registration number is valid!
Choosing the right retirement mortgage for you
In theory, it is illegal to discriminate against anyone based on age alone. However, this does not stop the mortgage industry from taking a sensible approach to affordable lending. Even in a best-case scenario, access to traditional mortgage lending reduces beyond 50. This is where lifetime mortgages and home reversion schemes come into play, with their conventional minimum age of 50/55.
For many, the crossover between traditional and later-life mortgage funding is seamless. There are numerous options, very often relatively quick settlement, but it is important to take financial advice from the outset.