Later Life Lending

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 –

  • Additional income in retirement
  • Repay an existing interest only mortgage
  • Early inheritance gift for family
  • Restructure existing debts
  • Holidays
  • New Cars
  • Home improvements

Once the plan is established and the costs estimated, the structure of the funds is required –

  • Is a lump sum required?
  • Is income required?
  • Is a combination required?
  • Is all of the money required now?

WHAT ARE THE ALTERNATIVES?

BEFORE considering later life lending, it’s important to consider all possible alternatives –

  • Is it possible to scale down and release a lump sum?
  • Is it possible for family to assist?
  • If income is required, is there access to state benefits?
  • Are there any other sources of funds?

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 –

  1. Standard Mortgage
  2. Retirement Interest Only (RIO) Mortgage
  3. Lifetime Mortgage

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 –

  • For standard mortgages, the maximum age can go to 80 – 90+ and pensions income is acceptable. People shouldn’t rush to lifetime mortgages assuming that they don’t have any other options based on age or the fact that they aren’t working.
  • Lifetime mortgages have changed a lot since the 1980’s. Back then, people used the funds to purchase fixed rate annuities and when rates sky rocketed while property prices reduced, they were left with too little income and negative equity. Now loans can be used for any purposes, rates (which are surprisingly competitive) can be fixed for life and providers (who include many mainstream insurance and pension providers) offer ‘No negative equity guarantees’. The sector is also heavily regulated to ensure the best outcomes for borrowers.
  • With most options, people still have the ability to move home during the term of the loan if they want to. However, if this is a potential plan from the beginning, it’s important to factor this in when speaking with advisers / providers as each company will have their own terms and conditions.
  • All of the options mentioned above mean that borrowers still retain ownership of their property. The mortgages are secured against the property so there will be conditions stating that the property must be kept in a sound state of repair (as with all mortgages), but the property is still ultimately owned by the borrower (there is a product option called a Home Reversion Scheme which involves selling part of the property. While these have their place, in the main lifetime mortgages tend to be suitable and preferable to a majority of people).

OTHER CONSIDERATIONS

When looking at later life mortgages, there are other considerations that may differ from mortgages in earlier life such as –

  • Entitlement to state benefits
  • Estate Planning
  • Long Term Care Planning
  • Inheritance Planning

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.

SUMMARY

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.