Raising Money to Pay Off an Interest-Only Mortgage
We know there are many people who are getting close to retirement, or who have already retired, who need to pay off an interest only mortgage.
This might have been with the intention of selling their home and downsizing so they could pay off the mortgage. Some may have had the expectation of a policy or investment that they could cash in to clear the debt. The battering that the stock market has taken recently might make this a bad idea.
Some people might have experienced a change in their personal or financial circumstances that has left them worried about being able to keep their home. Whatever the reason, it is helpful to understand the options available.
Many have put large amounts of money into their homes to build up its value. This has given them a more comfortable life and a saleable asset to help ensure they have a comfortable retirement. Unfortunately, they often have second thoughts about selling the home their family have grown up in.
To make it worthwhile, it is often necessary to move to a cheaper area which means leaving family and neighbours behind. Provided there is enough equity in the house, this might still be a viable approach, but if not, an alternative is needed.
Many lenders are taking a more modern approach to lending to people in later life and ordinary mortgages are available for people up until about age 85. This is good for people who have good pension or investment income, of for some who feel they never want to completely retire, but it isn’t available for everyone. You have to be able to show that you are willing and able to meet monthly payments and that the mortgage is still payable even if one of the incomes is lost.
It does mean that you are eventually debt-free but is probably only viable for relatively small mortgages and people happy to give up their retirement income to make the monthly repayments.
Retirement Interest Only (RIO) mortgages
These are relatively new and came about because the Financial Conduct Authority relaxed some of their rules a couple of years ago. This is still a standard mortgage, but the repayments cover only interest and the mortgage would normally be paid from the sale of the house when the last person either dies or must move out of the house into permanent care. It is a good way to make sure you preserve the value of the property.
The mortgage does not increase because you are dealing with the interest every month. Unfortunately, these are contractual payments and must be paid even if things go wrong or the property is at risk. Also, lenders will calculate your ability to pay the interest based on the person with the lowest income. Quite large amounts of guaranteed income are needed to make this viable and you must be happy to make those payments for life.
Equity Release – Lifetime Mortgage
Historically, these are words that might bring about fear and distrust but there is no longer need to be concerned. Provided you feel that you can trust the advice being given, you have a strict Financial Conduct Authority regime ensuring that you are treated fairly by both lenders and advisers. There is also a conduct supported by the Equity Release Council to which all reputable lenders, advisers and solicitors subscribe.
Options actually include something called a Home Reversion Scheme which allows people to raise a lump sum by selling their home at a large discount but having a lifetime lease which allows them to remain tenants until they die or require full-time residential care. This is not a popular option and most people looking for equity release avoid it. It tends to benefit younger people with a good life expectancy most and becomes lass attractive as people get older. The most common reaction, however, is that most people don’t want to become a tenant in a house they once owned.
A far more acceptable solution for most is the Lifetime Mortgage. This is a true mortgage secured against the house but with no obligations to repay any of the capital until the sole borrower, or the second of joint borrowers, dies or goes into full-time care.
Depending on the lender and the deal that you choose, it is possible to pay the interest in much the same way as a Retirement Interest Only (RIO) mortgage. This means the debt does not increase and only the capital borrowed will need to be paid off.
We have seen several instances where a lifetime mortgage has an interest rate lower than a RIO which means it is a cheaper deal and has more flexibility. If your future beneficiaries would like to protect their inheritance, they might choose to pay the interest for you.
The real benefit is that, either from the beginning of the Lifetime Mortgage, or later date that you choose, you can stop paying the interest and have no outgoings at all. In this case the interest will roll-up into the mortgage each year and the future debt will increase. It is worth remembering a couple of things. Much of the added interest could be offset by future increases in property value and this reduces a lot of the impact. The lenders complying with the Equity Release Council code of conduct will never expect repayment of more than the property values.
There are a number of options and even if you think that downsizing is the best for you, it’s worth a chat with one of our advisers to make sure you fully understand how the alternatives could work for you. Being as open as we can, we sometimes need to charge a fee to cover the costs of dealing in such a complex market. However, it costs nothing for an initial chat and you will be better informed even if you take it no further.
To get a clear understanding of what your best options are, give us a call on 01823 286271.