While many of the so-called baby boomers are sitting on significant profits on their property assets, it can be difficult to release equity in an efficient manner. The most common form of equity release is simply downsizing which allows you to sell a property, buy a smaller one and retain the balance. However, not everybody wants to leave their home.
Retirement interest only mortgages
Over the last few years we have seen the emergence of retirement interest only mortgages for, as you might have guessed, those in retirement. The majority of these mortgages are targeted at those 55 years of age and over. What do they offer? Why are they potentially better than equity release?
The best way to describe a retirement interest only mortgage is in a very similar manner to that of an interest only mortgage. The main difference is that a retirement interest only mortgage is open-ended and will come to a close when either the client dies or goes into full-time care. You will only pay the interest on the loan capital raised against your property and when the mortgage comes to a close the property will be sold and the original loan capital repaid.
How much can you raise?
It will vary from lender to lender but at this moment in time, perhaps until we see further competition, you would be hard-pressed to find an LTV ratio over 60% for a retirement interest only mortgage. Indeed the vast majority will also have some kind of cap on the maximum amount of capital you can raise. However, as competition continues to increase we are likely to see upward pressure on LTV ratios and maximum funding as well as downward pressure on mortgage rates.
One of the main issues with retirement interest only mortgages at the moment is the affordability calculation. A potential customer would need to show that they could cover the monthly interest payments via regular income. If they are in retirement this is likely to be potentially mixture of pension income and investment income. Note there is no need to determine how you would pay back the initial loan capital because this is central to the structure of retirement interest only mortgages. The capital will be repaid from the sale of the property in the event of death/moving to full-time care.
What is the main benefit over equity release schemes?
The main benefit which retirement interest only mortgages will have for many clients is the fact that interest is paid monthly and the initial loan capital will remain constant for the duration. The vast majority of equity release schemes will not require monthly payments but instead these interest charges will be added to the initial loan capital. Clients will therefore be paying interest on interest going forward so very quickly this can eat into any equity in a property.
There is no doubt that in some scenarios equity release schemes would be more appropriate (possibly the only option) than retirement interest only mortgages. Therefore, it is important that professional financial advice is taken before making any decision.