Retirement mortgages: could a retirement interest-only mortgage help your finances in later life?

The popularity of retirement mortgages is growing; here's how to figure out if they could be a good option for you

Retirement mortgages
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Retirement mortgages, or retirement interest-only mortgages, are still a relatively new mortgage product, but they are gaining traction. Not everyone knows that these mortgages exist, and yet they could be a great option for people who are coming to the end of an existing interest-only mortgage and aren't able to pay off all of their loan. They also suit those who would like to reduce their mortgage payments in later life in order to free up some cash for a better quality of life.

We explain what retirement interest-only mortgages are, how they differ from equity release, and who they can benefit. Ready to play with numbers? Use the handy online comparison tool from mortgage specialist Habito below.

Are retirement interest-only mortgages and equity release the same?

No. Equity release is sometimes referred to as a 'lifetime mortgage' and typically involves a lump sum borrowed against part of the value of your home. After you pass away or go into long-term care, the loan is repayed with the sale of the property, with interest, which has been added to the whole loan amount, or 'rolled up'. In that sense, equity release or a 'lifetime mortgage' isn't really a mortgage in the traditional sense.

Find out more about equity release in our guide.

Retirement interest-only mortgages are just like ordinary interest-only mortgages and involve monthly interest-only repayments. They do involve the eventual sale of your home, like equity release, but you are only repaying the loan itself. You have to undergo a mortgage assessment just like for an ordinary mortgage, although the criteria are different to a standard interest-only mortgage.

Who is eligible for a retirement interest-only mortgage?

Despite what its name suggests, a retirement interest-only mortgage isn't strictly for people in retirement, although there are age restrictions. Most lenders will want you to be between the ages of 55 and 85 to qualify, although some may consider you if you're a little younger or older. 

The most important eligibility factor, however, is being in receipt of a state, company, or private pension. This is crucial for proving to the lender that you'll be able to make the monthly interest-only repayments. Some lenders will consider your income if you're still in work, but not all will. 

There are also limits on how much you can borrow, which is usually between 40 and 60 per cent of the value of your home.  

What are the benefits of retirement interest-only mortgages?

  • They often are a financially sounder option than equity release, because there is no roll-up of interest. In some cases, equity release can lead to very little, if anything, being left upon the sale of the house, which affects any inheritance you may be able to pass on. Retirement mortgages allow you to eliminate the problem of accumulating interest, so you're more likely to be able to leave an inheritance.
  • They are a good option for people coming to the end of an interest-only mortgage and finding themselves unable to repay their loan. Switching to a retirement interest-only mortgage can make the difference between keeping and losing your home if, for example, the investment that was meant to cover the loan on your house hasn't materialised.
  • There is no fixed mortgage term, which means that you will always stay in your home until you die or go into care, no matter how long you live. 
  • You don't have to prove to your lender that you'll be able to repay the loan in full, just that you can make the interest-only repayments

What are the drawbacks of retirement mortgages?

  • The interest rates will not be great: most lenders offer interest rates of over three per cent on these types of products. 
  • You are not immune from house repossession if you fail to make the monthly repayments; this is another way in which a retirement mortgage is like an ordinary mortgage. If you find yourself in difficulty making the repayments, you'll need to speak to your lender about the possibility of equity release.
  • The amount you can borrow will depend both on the percentage of equity you own and your pension income.
  • You home will be sold when you die or go into care. 

Who offers retirement mortgages?

Retirement mortgages are currently offered mainly by building societies, for example Halifax. See the Habito calculator below to help you compare your mortgage options.

Comparing mortgages

Want to get more of a sense of numbers? Use the online mortgage secialist Habito's calculator below. 

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Anna is a professional writer with many years of experience. She has a passion for contemporary home decor and gardening. She covers a range of topics, from practical advice to interior and garden design.