It’s a fact that people are living longer, working longer and are more aspirational in retirement.
This has led to an increase in demand for mortgage advice from borrowers over the age of 55, but many aren’t aware of the options available. Further issues include concerns around inheritance, fear of negative equity and various emotions around borrowing in later life.
Some believe that their only option is an equity release or lifetime mortgage, but this isn’t necessarily the case and this may not be the best approach.
It’s important to seek specialist and independent advice, firstly to ensure that borrowing is the right approach and if so, the best way to structure it.
WHAT’S THE PLAN?
In the first instance, it’s important to clarify exactly what the plan is. Why is this money required and in what form?
There are many reasons why people look to borrow which include –
Once the plan is established and the costs estimated, the structure of the funds is required –
WHAT ARE THE ALTERNATIVES?
BEFORE considering later life lending, it’s important to consider all possible alternatives –
Although some of these alternatives may be viable, there are emotional factors to be considered. This is particularly the case around scaling down and family assistance. For example, some people may not want to move from their family home or feel that they may be burdening their family if they ask for assistance.
These are factors that need to be taken into account, but should be carefully considered before committing to later life mortgages. The first step should always be to consider all possible alternatives before looking at later life lending options.
WHAT ARE THE OPTIONS?
If a mortgage is the best route after considering the alternatives, there are essentially 3 options –
With a standard mortgage, affordability is assessed in the same way as any other application. Depending on the lender, different sources of income will be considered (employed, self-employed, pension etc) to calculate the maximum loan available. In the cases of interest only loans, a suitable repayment strategy will be required. Standard mortgages will more than likely be the cheapest interest rate, but potentially the harder option to arrange.
Retirement Interest Only (RIO) Mortgages, are designed to sit somewhere between a standard mortgage and a lifetime mortgage. They still require an affordability assessment as monthly payments are required. However, unlike standard mortgages there isn’t a set term. Loans are usually repaid in the event of death or moving into long term care (as is the case with lifetime mortgages), affordability is usually more favourable and the need for a repayment strategy isn’t required (because it’s assumed it will be the sale of the residential property).
Lifetime Mortgages are designed for people over the age of 55 who either don’t meet the affordability requirements for the other options and / or simply would prefer not to make monthly payments. Although not making monthly payments sounds great, in this instance interest will be ‘rolled up’ into the loan which will have an effect on the value of the person’s estate (and therefore the inheritance for beneficiaries). Rates can be fixed for life and although it’s possible to repay the loans early, penalty charges can be quite high so the important point here is really to consider a lifetime mortgage to be exactly that – a mortgage for life which is repaid in the event of death or moving into long term care.
There are pros and cons to each approach. Usually the way to approach this is to consider standard mortgages in the first instance and move through to lifetime mortgages depending on each person’s requirements. The deciding factors are the circumstances, requirements, goals and objectives of each individual.
PROS AND CONS
There are pros and cons to each approach and these will be included in future blogs.
The important to point to note is that there has been much innovation in this sector and later life lending is becoming mainstream.
Some key points are –
When looking at later life mortgages, there are other considerations that may differ from mortgages in earlier life such as –
If you speak to a specialist in the later life lending sector, they should either be able to advise you on such matters or have close links with other professionals who can advise you accordingly.
Whatever happens, it’s important to involve family in the process as early as possible and it is highly likely that lenders will require borrowers to take independent legal advice before completing on any mortgage.
Later life lending may seem like a bit of a minefield and can be confusing at a time where people weren’t expecting to borrow.
However, it’s important to consider that this sector is now becoming mainstream and the good news is that innovation has led to better options and more choices for borrowers.
The priority should be to find an independent adviser who specialises in the sector and works entirely on the customer’s behalf.
A good adviser will help a borrower (and their family) look at the alternatives, options, pros and cons before giving them all of the information they need to make good informed choices.