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Mortgages for Older People
Once you reach 55, the landscape for obtaining a mortgage changes considerably, and the closer you are to retirement age (or beyond), the harder it seems to be to get a mortgage.
However, with a huge range of specialist products designed specifically for older people, the truth is that the mortgage opportunities are as wide for retirees as they are for anyone.
In this guide, we weigh up all the options, including:
- standard repayment mortgages
- interest only mortgages
- retirement interest-only mortgages (ROIs)
- lifetime mortgages
- HELOCs
- and home reversions
...to help you better understand the right choice for your situation.
To speak to a mortgage adviser, please book a free consultation below with one of our experts.
Table of Contents
Why Are Mortgages Different for Older People?
4 Reasons for a Mortgage Beyond 55
- Purchasing a First Property
- Downsizing
- Purchasing an Additional Property
- Releasing Equity
6 Mortgage Types for Older People
- Standard Repayment Mortgages
- Interest-Only Mortgages
- Retirement Interest-Only Mortgages (ROIs)
- Lifetime Mortgages
- HELOCs
- Home Reversions
Why Are Mortgages Different for Older People?
Like any other financial product, mortgages present a risk to the lender. They provide you with the capital you need, but they want to be convinced that you’re able to pay it back.
This risk assessment, or underwriting, forms the very backbone of mortgage lending in the UK and is a vital stage to determining your mortgage viability as well as the terms that are offered.
Simply put, mortgages are a very long-term financial product, with the typical mortgage representing a loan of 25 years, and some stretching to 35 years. Once you’re 55, that means a standard mortgage won’t be repaid until you’re 80 and for most lenders, that’s a stretch too far - after all, you’ll be long retired and your income is unlikely to be what it once was.
That’s the crux of the problem - how do you show that you can comfortably make the repayments right into old age?
The issue becomes more significant the older you get, and if you’re actually of retirement age or older, then the question - without wanting to become morbid - is one of ‘will this mortgage be repaid before the borrower dies?’
Mitigating the Risk
Of course, there are ways that mortgage providers can mitigate the risk, making the idea of mortgages for older people a reality. This includes:
- Offering mortgages on shorter terms - Instead of getting a 25 year mortgage, how about a 20 year? Or a fifteen year? Of course, this means the monthly repayments are larger, but if you can afford those, it’s a good way to secure the mortgage.
- Offering a more detailed analysis of post-retirement finances - Some mortgage lenders are willing to look at your pension pot and analyse your financial stability based on the figures, showing that you can continue to make the repayments into retirement.
- Considering an interest-only mortgage - Interest-only mortgages have far smaller repayments and work on the basis that at the end of the term, the property can be sold to cover the cost of the loan. As monthly payments are lower, they are more affordable by retirees.
- Opting for a lifetime mortgage - A lifetime mortgage is one that is tied to the property until the owner passes away or leaves to go into long-term or end-of-life care. Rather than monthly repayments that a retired person would struggle to meet, interest is accrued and paid through equity in the property when the term is met. We’ll look deeper into lifetime mortgages later in this guide.
4 Reasons for Getting a Mortgage Beyond 55
There are many good uses for a mortgage later in life, and mortgage lenders have developed several products designed to meet these needs:
Purchasing a First Property
One of the most overlooked reasons for obtaining a mortgage after 55 is to buy a first property. Though getting on the property ladder is more traditionally achieved in your late 20s or 30s, with the difficulties inherent in today’s property market, many people struggle to achieve the financial stability they need to afford a mortgage until later in life.
Consequently, there are plenty of people in their fifties still desiring that first home, having rented for many years previously.
These over 50s first-time buyers would look to a standard mortgage to achieve their ends, perhaps negotiating shorter terms to provide the assurance that it will be paid off before retirement.
15-year or even 20-year mortgages are perfect products for those in this position, providing the shorter terms needed to clear the mortgage debt prior to age 70 or so, but there is no reason to stick to these ‘rounded up’ years.
Most lenders have the flexibility needed to set a mortgage for the precise number of years until retirement - so if it’s 18 years until your retirement date, simply request an 18-year mortgage.
Plus, even when over 50, you will still be eligible for all those first-time buyer benefits, such as an exemption from stamp duty land tax.
Downsizing
Downsizing is the process of moving out of a larger family home into a more comfortable smaller home once family members have grown and moved on.
For some people, downsizing doesn’t require any further financial assistance, with the sale of the property generating enough capital that they can buy a new home outright and even have enough left over to put into savings or other uses (such as a well-deserved holiday!).
For others, however, there’s a need to look to a mortgage to obtain the desired new property. This can happen because:
- The mortgage isn’t fully repaid on the family home;
- The downsizing also means moving to a more expensive area;
- Downsizing is occurring due to a relationship breakup and involves sharing the equity from the family home.
In these cases, a standard mortgage with shortened terms is likely to provide an answer, as might a retirement interest-only (RIO) mortgage.
Given the equity that will be released from the sale of the family home, the mortgage terms on a new mortgage are likely to be quite favourable as the required loan-to-value (LTV) of the new mortgage will be low.
Purchasing an Additional Property
Many people who have equity in an existing property will look to use that financial power to buy an additional property. This may be for:
- a holiday home;
- to provide accommodation for a family member (for example, a student child or grandchild);
- to rent out.
In many of these cases, the best type of mortgage may be an interest-only mortgage.
It is typical to either then sell the property to repay the principal, hopefully making profit on the investment; or to use another mortgage product to replace the interest-only mortgage.
Interest-only mortgages can have flexible terms making them useful as a relatively short-term mortgage option that can be re-evaluated at a later date - for example, the holiday home is no longer wanted, the supported student family member completes their degree and moves on, or the landlord wishes to retire from the responsibility.
Releasing Equity
Releasing equity is one of the primary uses of a mortgage later in life.
With a substantial amount of capital tied up in the home, it is often extremely advantageous to leverage this asset for other uses.
Retirees and older people gain some advantages when looking to release equity in their property, with mortgage products available that do not require being repaid in the homeowners lifetime, effectively releasing the money with zero personal downside.
These lifetime mortgages allow the homeowner to remain securely resident in the property until their death while also providing funds that can be used to enjoy retirement years.
Equity release is often used for the following:
- Accessing money to help other family members;
- Providing funds for home improvements, adaptations for disability considerations, and property maintenance;
- Increasing retirement capital for comfort;
- Debt consolidation and repayment;
- Large secondary purchases, such as a car or holiday-of-a-lifetime.
It should be noted that there are legal limitations on equity release, which means the money cannot be used to start a business, invest or gamble in high-risk ventures, or support any illegal activity.
6 Mortgages for Older People
As lenders become more and more aware of specific customer needs, they develop and redevelop their product line-up to present the most efficient and helpful ways of financing property purchase and equity release.
Over the past twenty years, the number of later-life mortgage products has increased, with a view to flexibility.
It is worth noting that all genuine UK mortgage lenders are overseen by the Financial Conduct Authority, meaning that they all adhere to a strict set of guidance to ensure responsible lending and caring about their customers.
Remember that in every instance, a mortgage is a loan that is secured on your home and missing repayments may result in the repossession of your property. Your home is at risk when taking out a mortgage.
1 - Standard Repayment Mortgage
A residential repayment mortgage is the standard mortgage that most people think of when they hear the word ‘mortgage’. It takes the form of an asset-based loan that is taken out using your property as collateral.
Repayment mortgages are repaid through regular monthly repayments. Each repayment covers the interest that has accrued in that month as well as a portion which repays the balance of the loan.
Over the loan term, the principal of the mortgage will be repaid in full, leaving nothing owing at the end.
Standard residential repayment mortgages have terms from 10 to 35 years, with most mortgages provided on 20 or 25 year terms. Lender flexibility means a mortgage can be requested for a number of years to suit your needs.
Mortgages with shorter terms will have higher monthly repayments and result in less interest being paid over the life of the loan.
Residential repayment mortgages become harder to obtain as you get older, due to the length of the mortgage term and the need to have a sustained income during that time.
While some lenders will consider your pension when calculating mortgage repayment viability, many will only consider a standard repayment mortgage while you are in employment.
Finding the right lender is crucial when looking for a standard mortgage as an older borrower - this is where working with a specialist mortgage adviser can be beneficial.
Interest-Only Mortgage
An interest-only mortgage is one where the monthly repayments consist only of the interest on the loan and there is no repayment of the mortgage principal, or balance.
Interest-only mortgages work primarily on the basis that property values can increase overtime, thus there can be profit to be made at the end of the term upon the sale of the property.
As the monthly repayments are only made up of the loan interest, they are substantially smaller (and more affordable) than a full repayment mortgage.
Interest-only mortgages do typically need a higher deposit than a repayment mortgage, with 25% to 40% a usual requirement.
Lifetime Mortgage
Designed for people who are already retired, the lifetime mortgage is a specific product designed to release equity in the property with no repayment schedule.
Lifetime mortgages are a powerful way to get access to the money tied up in the home with zero direct downside to the homeowner. For many, they represent the perfect means to enjoy retirement and recoup the investment of years of hard work and standard mortgage repayments.
However, lifetime mortgages can have a significant impact to those left behind once you pass, potentially leaving them with far less inheritance from the property.
It is important before taking out a lifetime mortgage that you have full understanding of the implications.
A lifetime mortgage works by providing you with a loan that has no monthly repayments - instead, the principal of the loan and any accrued interest are all due upon a life event, which are:
- Death - The death of the homeowner will result in the lifetime mortgage becoming due in full.
- Moving to a new property - In some instances, the lender may be willing to move the lifetime mortgage over to the new property, but this will require a second application and may be rejected if the new property is not considered viable as collateral for the loan and any interest accrued. Moving with a lifetime mortgage in place can therefore be difficult can trigger a full repayment of the lifetime mortgage.
- Entering long-term care - When the homeowner leaves the property to enter residential care, it will likely trigger the necessary repayment of the lifetime mortgage.
As the lifetime mortgage accrues interest throughout its existence, when it does become due, the full sum due may be considerably more than the original amount borrowed, especially if many years have passed.
However, a lifetime mortgage will never exceed the value of the home used as collateral, so the estate of the deceased will not find itself in additional debt.
HELOC
A HELOC, or Home Equity Line of Credit, is a version of a lifetime mortgage that functions as a revolving credit facility in much the same way as a credit card, enabling you to dip in and out of it as you need.
The main advantage of a HELOC over a lifetime mortgage is that you only pay interest on the money you use, rather than drawing a large sum in a single instance, and that for the first five years (known as the draw period), you can repay your borrowing to keep the interest low (or even zero) and retain the equity in your home.
Retirement Interest-Only Mortgage (RIO Mortgage)
Combining the best parts of both an interest-only mortgage and a lifetime mortgage, a retirement interest-only mortgage, or RIO, offers retired people a tailored solution that solves the perceived problem of a lifetime mortgage while keeping the low monthly repayment structure of an interest-only mortgage.
The main advantage over the standard equity release lifetime mortgage is that a RIO doesn’t accrue interest, as that portion of the loan is being paid monthly, which means the size of the mortgage remains the same and there’s no negative impact for beneficiaries of the estate.
The lower risk inherent with a retirement interest-only mortgage when compared to a lifetime mortgage means it is also more flexible in its usage.
Not only can it be used as an equity release product for money already tied up in the home, but it is a viable product for use when purchasing new property. Homeowners looking to downsize to a more expensive property, or those seeing holiday homes for their later years, can utilise a RIO to accomplish their desires.
See here for an in-depth look at RIO mortgages.
Home Reversion
Though not truly a mortgage product, home reversion policies represent an alternative option for those looking to release equity in their homes.
That provider then pays you for the equity, either as a lump sum or regular monthly payments - whichever is more suitable for you.
In this way, you can release the money tied up in your home to make your retirement more enjoyable.
A home reversion policy doesn’t generate interest; simply a percentage of your property now belongs to the provider and, when you move out or pass away, the property is sold so that they can reclaim their investment.
Getting Advice
As can be seen in this guide, there are plenty of options for older people and retirees when it comes to both buying a property and releasing equity in existing homes.
While we’ve done what we can to give an overview of these products and how they work, if you are looking to get a mortgage as someone over 55, we recommend you speak to an expert who will listen to your specific circumstances and advise you on the best course of action.
At Clifton Private Finance, our team of mortgage advisors and the expert partners we work with are dedicated specialists with an in-depth understanding of the finer nuances of mortgages for older people.
We are here to help you find the right deals, obtain the best rates, and enjoy a smooth experience when getting your mortgage.
Contact us today to ask any questions and get some personal help.
