Borrowing Into Retirement & Lending Into Retirement – Which Mortgage is Best For This?
Some people believe it’s too late to consider taking out a loan once they have retired.
However, there is no official upper age limit when it comes to borrowing money, so we encourage you to consider this if you are in an unstable financial situation.
There are various ways you can access money, which will be explained in this article.
Why Do People Borrow Money in Retirement to Repay Later?
Even if you have savings and you were receiving a healthy income for most of your life, your situation can change very quickly and you may be left with less money than you planned to have post-working life.
For example, the cost of living has recently increased, and many pensioners will not have expected or prepared for this event.
Consequently, they may choose to be an applicant to receive funding as they need to increase the income they are receiving.
This is particularly true if their pension income is modest. Many older borrowers are more persuaded to borrow cash if they do not have any dependents, as there is less concern surrounding the amount of money that will be left at the end.
Another reason for the popularity of later life lending is older people wanting to help out the younger generation who are first-time buyers.
For instance, many older people want to help their grandchildren to secure a deposit on a house or to keep up with a mortgage, so they may decide to borrow money that they can repay later as a way of facilitating this.
Is a Retirement Loan for You?
No one else can tell you if this is for you, so it’s up to you to research the peaks and pitfalls to decide whether you’d like to go with this option or an alternative.
However, we can tell you who may benefit from lending money after they leave work. The type of person who is suited to this is someone who is struggling financially yet has sufficient assets, and is looking to borrow cash to get by, or to fund a project.
What do Lender’s Look For in a Client of Retirement Age?
Firstly, to apply for a mortgage in retirement, you must be of retirement age and have officially commenced your retirement, which goes without saying.
Some mortgage lenders have a maximum age for their schemes, so you will need to be aware of this when settling on a plan.
It is usually a disadvantage to be older, but it can also lead to lower interest rates and eligibility for specific schemes such as the enhanced/ill-health mortgage. As we are living longer, providers are more likely to be lenient with their maximum age, though the minimum age is always 55 for lifetime mortgages and 65 for home reversion.
Next, you need to have an asset to offer, such as a valuable property. Without anything to offer to a provider, you are not likely to receive a loan. However, having assets means the lender can take the risk of lending you money.
Finally, your income will often be considered. Generally, if you receive very little income, the payment that you will receive will be significantly reduced. However, it’s still worth checking as certain plans do not perform income checks.
1. Lifetime Mortgage
To do this, you must be at least 55 years old with a property of at least £70,000 that is located in the UK. You must be the official homeowner of the property.
Instead of being charged a monthly sum, you will not be required to repay the debt until you pass away or move into long-term care. At this point, your property will be sold and the provider will benefit from the sale.
2. Home Reversion
A less common way to earn money after leaving work is to have a home reversion, which means you will sell part of your property to a lender, and they will benefit from the increasing value of this share, eventually taking the money that is produced when the property is sold.
You must be 65 years old to have a home reversion, and you must be prepared to renounce your status as the sole homeowner, as the provider will also own part of your home.
However, the home must remain your main residence. It is also possible for you to sell off your entire home using this method if this is what you’d prefer.
3. Retirement Mortgage
This type of mortgage is another form of equity release, but in this case, you will always receive the loan just before or after you finish work.
If you are keen to get on top of your financial situation early, you could look into this type of mortgage as it will provide you with financial security as soon as you stop working.
This scheme is beneficial for people who are looking to move home for a fresh start but cannot afford to do this without some financial aid.
Retirement Interest-Only Mortgage
This is a very similar type of mortgage to the plan mentioned above, but with this plan, you are expected to pay interest each month, and the rates of interest are variable.
What Do I Need to Provide as Evidence for a Retirement Mortgage?
If you are employed, you will usually be expected to provide your state pension forecast, your P60, and any other document that reflects what your income will look like for the later stages of your life.
If you are self-employed, you can expect to show your trading account information from the past three years in order for the existing lender to consider your application.
We advise you to only give this information to a reputable firm that is authorised by the prudential regulation authority and regulated by the financial conduct, as well as being a member of the Equity Release Council (ERC) to protect your safety.
What are the Pros and Cons of Equity Release Schemes in Retirement?
There are many benefits of equity release plans. Firstly, if you do not have the income to make ends meet without continuing to work, or if you cannot afford to treat yourself in any way, releasing equity is a wonderful tool as it allows you to make the most of the income that is currently locked in your property.
There are also a wide variety of plans available, so you can select a plan that is tailored to your needs.
For example, if you want to purchase a second home, you could opt for a second home plan, which allows you to buy a home anywhere in the world through lending money.
Finally, if you do not need to leave any money to anyone, it’s a great way of ensuring you get to enjoy all you have earnt rather than this being passed on to the Crown.
You are able to spend your funding on anything you like, so you can live the life you always dreamed of.
On the other hand, you have to accept that equity release schemes can be an unwise decision for some people, as it is a huge commitment and you could face penalties if you do not continue the plan to the very end.
If you are wanting to receive a lump sum of tax-free cash, it will come with high interest rates, so you must consider whether this is something you are willing to pay, particularly as this takes away from your income that could have been passed onto your family after your death.
You could always choose to move to a home of a smaller size so that you are spending less money on a mortgage and bills.
Some people already need to move from a house to a bungalow, so this is the perfect opportunity to do so and to improve your financial situation at the end of it.
What’s more, many people do not need all of the space in their home after their children have moved out, so downsizing is sometimes a no-brainer.
Having said that, if you are happy in your home and you do not want to move, whether because of the size, location, accessibility, or something else, you may decide to rule out downsizing as an option.
2. Moving Lender
If you are not happy with your current lender, it is sometimes possible to move, however this must be written in the conditions of your plan. Sometimes, you will be permitted to leave, but you will have to pay for the privilege of doing so.
To ensure you go with a trustworthy provider in the first place, we encourage you to consider some of the following companies: Aviva, One Family, and Hodge Lifetime. Find more of our recommended lenders on our website.
3. Getting a Mortgage Extension
It is sometimes possible to request an extension to your mortgage term if it is coming to an end and you have not yet managed to complete the repayment.
If you are successful, the provider will extend the term of the mortgage, and you could be permitted to pay less each month, but to continue to provide monthly payments for a longer amount of time.
Can I Plan Ahead to Borrow in Retirement?
It’s possible plan ahead, and in fact, we encourage this. Use our website to help you understand how you could earn money from your assets after finishing work, as it’s never too late to learn about this.
Am I Entitled to Money After I’ve Already Retired?
Yes, it is not a requirement to organise your loans ahead of time, so it is perfectly acceptable to begin the process once you’ve already been retired for a few years.
As long as you’re within the age range for the plan you desire and you meet all their requirements, the date that you retired will not restrict you in any way.
Can I Release Equity With a New Mortgage If I Have an Existing Mortgage?
You are still a candidate for equity release if you have an existing outstanding mortgage, but the options available to you will be reduced – you are likely to receive less funding. Meeting with a financial adviser will clear this up, as they will assess whether you are still able to release equity despite currently having a traditional mortgage.
If you do meet the critieria, the funding that you receive must first be used to pay off your existing mortgage.
Do I Have to Prove My Income to Get a Loan?
Sometimes you will have to prove your earnings in order for a provider to offer to lend you money, which is known as an affordability assessment.
This often goes hand-in-hand with credit checks, so you are in a much better position if you have good credit. However, do not discount the entire idea if your income is low or your credit rating is poor, as certain plans do not take this into account.
Contact Us For Further Guidance on Borrowing Into Retirement
We know that it can be overwhelming to learn about the many funding options that are available to you when your career ends.
That’s why we offer a telephone assessment where we can explain these options in more detail and help you find a plan.
When you provide us with all the important information about yourself and your financial situation, we’ll consider which option is right for you and show you how to get started with the process.
Even if you’re debating different options, please reach out to us and we will do all we can to equip you with the knowledge you need to make an informed choice.
We will ask for some personal details on this form, but please rest assured that we will not bombard you with emails if you decide that releasing equity is not for you.
We are simply here to answer your questions and guide you towards a suitable plan if this is something you are interested in.