There are two options when considering lending in retirement:
- RETIREMENT INTEREST ONLY MORTGAGES are standard interest only mortgages that let you pay the interest on the loan monthly and have no set end date. The outstanding amount does not reduce over the term. Like the lifetime mortgage/equity release mortgage, the loan is paid off when the owner living in the property goes into care, sells their home or dies. The remaining equity in the property is used to pay off the mortgage.
- LIFETIME MORTGAGES, also known as EQUITY RELEASE MORTGAGES, are available to those over 55. The mortgage is paid off when the last person living in the property goes into care, sells their home or dies. The remaining equity in the property is used to pay off the mortgage.
So what is the difference between the retirement interest only mortgages and lifetime mortgage/equity release?
Retirement interest only mortgages require borrowers to pass affordability checks and commit to regular payments for life. It is suitable for those with guaranteed stable incomes such as final salary pensions or annuities. You can go to a general mortgage broker for one of these.
Lifetime or equity release mortgages are more suitable for those whose income is not stable or guaranteed or simply do not want to commit to regular mortgage payments for the rest of their lives. Lifetime or equity release mortgages are sold by specialist equity release advisers.
There is a third option. There is a hybrid mortgage, a mixture of the retirement interest only mortgage and lifetime or equity release mortgage. You can start off paying some or all of the monthly interest and then convert to an equity release product that allows you to roll up the interest to be paid at the end of the mortgage when that person goes into care, sells their home or dies.
What should I expect with interest rates on equity release products?
The average interest rate on an equity release product has been steadily falling over the last few years. Most people choose to not pay off the interest during their lifetime, relying on the equity left at the end of the mortgage term to pay it off. With falling interest rates families will inherit more.
Once a life time or equity release product has been set up, they are not re-negotiated, unlike conventional mortgages.
Flexible, drawdown Equity Release Mortgages
There is now more flexibility with lifetime / equity release mortgages. Some providers allow you to 'drawdown' lump sums from your mortgage as and when you want to after establishing the maximum you can release at the beginning of the term. The interest charged is only added onto the equity release mortgage once it is released so it builds up more slowly rather than releasing the full amount at the outset.
What protection do you get with Equity Release?
- Some providers allow you to repay the loan back early after 5 years if you downsize.
- You can pay off up to 10% of the initial amount you borrowed if required.
- Pay of some of the interest payments during the term to reduce the amount outstanding at the redemption.
- Protect some of the equity in your home for your loved ones.
- If you are suffering ill health you can get a better rate of interest for your equity release mortgage.