"For someone in their fifties, who may feasibly live for another forty years; compound interest over such a time is likely to erode a huge proportion of the remaining equity in someone’s home."
People over the age of 50 often find it difficult to get a mortgage because many lenders will not take future income, such as pensions, into account. But some lenders do, in particular those who offer retirement interest-only mortgages (RIOs), such as LiveMore.
Later life borrowers who find they cannot get a mainstream mortgage, often turn first to equity release. Many brokers are also trained to look at equity release as a first solution but, while it has a really valuable role to play, it may not always be the best option available for a borrower.
Tempting as equity release might be with no monthly payments to make, there are many reasons why people may not qualify or why it simply is not the most suitable product for them. This is heightened if the borrower is only in their 50s.
Reasons could include age restricted properties; the construction type may not fit with the lender’s criteria, or the customer would prefer to retain a significant proportion of equity in their property and doesn’t want to run the risk of this being eroded. In each of these cases retirement interest-only may be a viable, affordable and the best option.
We often find borrowers coming to LiveMore who thought that equity release had been their only option, but then found they didn’t qualify. Often someone doesn’t have enough equity in their property to achieve the loan amount they require for equity release but we can provide a RIO up to 75% LTV.
Equity release also wouldn’t be applicable if your clients are a couple with only one person over 55 and the other applicant is aged between 50 and 54.
Typically, equity release is more suitable for customers considerably older than their late fifties. The reason is, because the borrower doesn’t make any payments off the loan during their lifespan, the interest compounds, meaning that the total loan balance gets ever larger. For someone in their fifties, who may feasibly live for another forty years; compound interest over such a time is likely to erode a huge proportion of the remaining equity in someone’s home. This means, the final loan repayment value at the end of the term could be incredibly high in comparison with the original loan, maybe as much as the value of the house.
For much older people this is less of an issue. Someone in say, their seventies or eighties, is likely to live for a comparatively shorter period and so the interest will not accumulate to the same extent.
For younger people, or for people who don’t like the idea of compound interest, the alternative is a retirement interest only mortgage. Here the interest is paid back each month which means that the loan size does not increase with time. Because only the interest is being paid, the monthly payments are usually affordable, even on a pension income.
This means that, with a £100,000 interest-only loan for example, as the interest is paid each month, the borrower still has a £100,000 loan to repay at the term end. If that were a £100,000 equity release loan, the amount repayable at the end loan will be much higher because of the accumulating interest.
Another benefit is that interest-only mortgages often come with an option to overpay, in our case by up to 10% of the capital annually, so the original loan then reduces each year, as does the monthly interest payments because the capital amount is reduced.
Monthly repayments are much lower than a typical capital and repayment mortgage therefore, depending on affordability and individual borrower circumstances, a customer may be able to borrow considerably more than the standard 4.5x income multiple.
Income does not have to be just salary either as lenders like LiveMore take into account components such as investments, property rental income and pensions, whether they are being drawn down or not.
Later life lending is a complex area which is why it is so important for people to get expert advice from brokers who understand all options and can identify the best product for their customer. There is no one-size-fits-all and the later life market is such an interesting area for brokers to specialise in.
