Guide to borrowing past retirement age
Fortunately, ‘later life lending’ is on the increase.
According to some definitions, later life lending actually accounts for two distinct sets of borrowers. The first is standard mortgage borrowers who simply want to borrow later in life, past the typical retirement age of 65. So, they may want to buy a home at the age of 60 on a 25-year term.
Things have improved significantly for these borrowers over the last year, and expectations that mortgages will be fully paid off by 65 are being quickly eroded. Many lenders have increased their maximum age limit, up to age 85 in the case of Nationwide, while Cambridge Building Society has scrapped its maximum age limit altogether.
The second set of borrowers is made up of those who want to release equity from their homes – equity release – to fund retirement or pay off a mortgage shortfall. According to Aviva, almost half of over-45 homeowners see property wealth as a key part of retirement income planning.
The equity release sector recorded its highest ever lending total in the third quarter of 2016, with lending expected to have broken through the £2bn mark by the end of 2016, according to the Equity Release Council.
Product innovation in the sector has meant that new flexible products have been developed that better meet the needs of older homeowners. In addition, equity release mortgages, known as lifetime mortgages, are cheaper than ever before. Bob Champion, chairman of the Later Life Academy says: “It is now possible to find interest rates that are guaranteed for life, which are lower than most lenders’ standard variable mortgage rates which can be increased at any time.”
Innovations in the sector include drawdown mortgages, where you agree a maximum loan amount, but you don’t take all of the money at once, just what you require at the time. You can then withdraw money up to your maximum when you need it and you are only ever charged interest on the amount you have actually taken, not the maximum amount.
Lenders have also become more flexible around early repayment terms on lifetime mortgages so that borrowers can make partial repayments penalty-free on some products or opt for a monthly repayment until they decide to let the interest roll up.
Roger Marsden, managing director of equity release at Aviva UK, says: “The industry has been working hard to make sure that lifetime mortgages offer customers flexibility when they’re planning their retirement finances, and today’s products are very different from those which existed in the 1980s and 1990s.”
Bridging the gap
This transformation of the products available combined with changing demographics has boosted the popularity of equity release massively. And the very latest innovations are designed to bridge the gap between borrowers with a standard mortgage that will run into retirement, and equity release customers. These hybrid products are a brand new concept in the UK mortgage market.
Champion explains: “Flexible products have been introduced that are interest-only mortgages that can be switched to equity release at any time. These products keep the amount borrowed at the original amount until such time as the borrower decides to flip the contract to a lifetime mortgage. If income is going to be restricted during retirement there will come a time when it is not possible to repay the interest on the loan. It is only from then that the outstanding interest is rolled up. These products provide more flexibility which is what some consumers want.”
Equity release is changing massively and the recent focus on later life lending as a spectrum rather than separate sets of borrowers is an exciting one. As more people rely on equity in their home to fund their later years, flexible borrowing options that adapt to your changing needs look set to become more widely available.
Of course, the impact of rolling up interest can reduce the equity in the home, and the amount that will be left to your family on death. Equity release should never be entered into lightly, and always with independent financial and legal advice.