So, what is Later life Lending? Broadly speaking, for any homeowner(s) over the age of 50, it’s a means to raise capital from within the equity in your home. Before moving on though, let’s first dispel the biggest myth around this type of borrowing – “You will lose your home”.
Pre-regulation, there were many stories of people losing their homes as their borrowing exceeded the value of their homes and loan companies looked to recoup the debt. In the 20 years from 1971 until regulation started in 1991, Equity Release Lenders pretty much set their own rules and this is where the poor reputation comes from. The industry has moved on a lot over the last 20 years though and, providing you go through a reputable broker who will place you with a mainstream Lender in this market, there should be no nasty surprises down the line nowadays.
In the early days, raising money against the equity in your home did not come with many choices whereas today, this is a growing market place and Lenders are looking to help it flourish. Terms such as Equity Release, Home Reversion, Lifetime Mortgage are starting to merge into one as the choice of providers and options expand - ‘Later Life Lending’.
Perhaps to understand why Later Life Lending even exists, we need to start with why homeowners over 50 are wanting to raise money and what the obstacles are to traditional mortgage borrowing.
It’s fair to say that home ownership has been on the rise for decades, although rising property prices and interest rates have affected the number of first time buyers in more recent years. This links into one of the biggest reasons why over 50’s may want to raise money; to help their children – the new first time buyers of today. There are well over 100 regulated mortgage Lenders in the mortgage market and if ‘Bank of Mum & Dad’ were added to that list, in terms of total money lent, you may be surprised to see them feature in the top 10 in recent years. However, money is being raised for many other reasons too; boosting retirement income to cover rising living costs, to pay for large unexpected costs / expenses, as a means of staying in your own home longer, or simply to fund retirement at a level such that you can enjoy later life fully.
Apart from more people owning their own homes today, we’ve seen a big change in pension schemes and retirement planning over the last few decades too. Gone are the days when the larger employers were all offering final salary pension schemes and auto enrolling new staff into them on day one, guaranteeing that employee two thirds of their final income for life after 40 years of work. The vast majority of pension schemes on offer nowadays to people entering the employment market are money purchase schemes, where you build up a pot of money over time. The amount of money you pay into these schemes each month, within limits, is up to the individual and so it isn’t surprising that your average 20 year old doesn’t see a need to part with money now, towards a promise of something back almost 50 years into the future. They are more likely to use it to fund a mortgage to buy a home and perhaps this shift is partly why we are starting to see more people with money tied up in their home as they approach retirement, but with the prospect of a large decrease in income when they finish work. Is your home the pension of the future?
Whatever the reason you may wish to take some of the capital out of your home, the way you go about it has to be carefully considered. Even at retirement age, you may still qualify for a more traditional mortgage, like you may have had over the preceding 40 years or so. You do still have to meet the same criteria and this is where many people lose this option. Since the crash of 2007/2008, most Lenders have stricter terms around offering an Interest Only mortgage and so most applicants fail to meet the criteria, meaning a more costly Repayment mortgage is the only traditional option which may be on offer.
Affordability is key to borrowing on a traditional mortgage and it is affordability as assessed by the Lender, not what you feel is affordable. Lenders will typically look at affordability over the entire mortgage term, not just at the point of application. So, a 55 year old applicant may have substantial income today and appear to fit criteria for a 25 year term mortgage but, if retiring at 68, will their pension income still support the same mortgage? If not, borrowing could be restricted today to an amount the pension will support, even if that pension doesn’t commence for 13 years. Alternatively, the current income might support the same loan amount over 13 years, to finish before retirement, although the monthly repayments will be higher and this might make it unaffordable in the applicant's view, even if the Lender is happy.
A relatively new addition to Later Life Lending options is the Retirement Interest Only (RIO) mortgage, which may offer an affordable method of taking some of the equity out of your home and these are starting to become a credible solution for a borrower over 50 years of age, working or not. Despite the title, you do not have to be retired to take out a RIO mortgage, although it is likely to be on the horizon and your expected income in retirement is used to assess affordability. As the premise of a RIO mortgage is that you just pay interest on the loan, although schemes give you options to repay the capital if you want to, the amount you borrow is fundamentally governed by monthly cost and the Lender’s affordability calculations. In contrast, the amount you can borrow from the older ‘Equity Release’ schemes is aged based – broadly speaking, a maximum of 20% of your home’s value at an age of 50, rising to about 50% at age 80. This is because, with no requirement to make any payments whatsoever, a Lender is simply looking to avoid the loan and any accumulated interest exceeding the value of your home over time.
For a joint application under a RIO mortgage, consideration is given to the income of the remaining partner after the first death. With Equity Release, it’s the age of the youngest borrower that limits the borrowing. This is because, in both cases, the trigger for repayment of a Later Life mortgage loan is usually the first of three events; death, moving out of your home into long term care, or you deciding to sell the property. With a joint application with your partner, it’s the second of you to die or go into long term care which triggers repayment, not the first, so that a couple have the security of knowing they can continue to live in their home.
Because of the way the various options are designed, it’s possible to accommodate most people's wishes under one of the schemes. Although not always the case, if you work on the premise that it is the future sale of your home which will eventually be used to repay the loan, it’s easy to understand why Lenders are comfortable to offer a mortgage under a Lifetime deal that they wouldn’t on a traditional mortgage. With no requirement to repay the capital you actually borrow, the main / affordability criteria issue is dramatically reduced. As these mortgages are also available to buy a home, not just to remortgage your current home, it’s possible to sell your home, pay off the mortgage and buy a new home with a new Later Life mortgage product – just like a traditional mortgage and subject to you still meeting criteria.
Some Lenders will allow you to make repayments of the capital you’ve borrowed, to allow you to work towards becoming mortgage free (again), some will allow you just to pay interest so that the amount you borrow remains static over the life of the loan, and some require no payments whatsoever. However, in the case of the latter, the amount you owe actually rises over time as interest is accrued and added to the loan. Although most reputable firms guarantee the debt will never exceed your property’s value, it is possible over time under the last scenario for you / your next of kin to realise no further value upon the eventual sale of the property.
Unless you commit to a certain term, with a view to making capital repayments to clear the balance, these mortgages are usually open ended and so this removes any pressure on you to actually pay back the loan. Although it is expected to repay the loan on eventual sale of your home, as above, that is not to say you can’t repay the loan at some point sooner, if you want to – perhaps from an inheritance, or other lump sum? You do need to plan this though as many schemes, like their traditional counterparts, will have ties and you may incur penalties for early repayment.