As retirement nears, there are some big choices to be made if you are on an interest-only mortgage.
You’ll likely discover your existing deal is hard to renew.
You might also want to access some of the capital locked up in your home – maybe the windows need replacing, you need a downstairs toilet due to poor mobility, help grandchildren with university fees, perhaps gift them the deposit on a first house.
The question then is – should you go with a retirement interest-only mortgage or a lifetime mortgage in the form of equity release.
Much depends on your age and personal circumstances.
But, don’t fret.
There are plenty of internet outlets explaining the pros and cons – one of the most straight forward coming from website, Money Helper.
A retirement interest-only mortgage is only available on your main residence and is similar to a standard interest-only mortgage.
While there is no minimum age requirement, these are generally aimed at older borrowers and pensioners.
There are two parts to paying off a retirement interest-only mortgage. The interest and the outstanding capital.
During the term of the mortgage, you will make monthly payments to cover the cost of the interest on your loan. If the term is due to expire and you don’t have the means to repay the debt and want to remain in the house then it could be that equity release is a possible option. These mortgages run for life and can be applied for after a retirement interest-only mortgage expires.
So, why could this be a good choice?
Hopefully, you will still have something to pass on as an inheritance. There is no problem of interest roll-up – which is when interest builds and builds. You will avoid having to sell your home. The package is generally cheaper when compared to an interest roll-up lifetime mortgage.
However, you need to pass the mortgage affordability checks and your home is at risk if you do not keep up the repayments.
With a lifetime mortgage, you take out a loan secured on the property that does not need to be repaid until you die or go into long-term care. Your home still belongs to you.
If there’s not enough money left from the sale to repay the mortgage, your beneficiaries might have to meet the deficit from your estate. To guard against this, most lifetime mortgages offer a no-negative-equity guarantee whereby the lender promises that you (or your beneficiaries) will never have to pay back more than the value of your home.
This is the case even if the debt has become larger than the property value.
There are two different types of lifetime mortgages.
With an interest roll-up mortgage, you get a lump sum or are paid a regular amount and get charged interest which is added to the loan. This means you don’t have to make any regular payments.
In the case of an interest-paying mortgage, you get a lump sum and make either monthly or ad-hoc payments. This reduces, or stops, the impact of interest roll-up.
You can take an initial lower sum and agree a drawdown facility for later years perhaps for use after one of you die and there is lost pension.
There are a few factors to consider before taking out a lifetime mortgage.
It may reduce the amount you leave as an inheritance. It could affect your tax position and entitlement to means-tested benefits.
If any of these is a problem, an equity release scheme might not be suitable.
Speak to an independent mortgage broker who can fully assess which is the best route for you.