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Retirement interest-only mortgages

Retirement interest-only mortgages offer a lifeline to older borrowers and can be a cheaper alternative to equity release. Here’s what you need to know.

Retirement interest-only mortgages

What is a retirement interest-only mortgage?

A retirement interest-only mortgage is a home loan aimed at older borrowers who may struggle to get a mainstream mortgage due to age limits.

With a retirement interest-only mortgage you repay the interest on your loan monthly. You don’t have to repay the capital until you die or go into long-term care. Then your home is sold, and the lender is repaid from the proceeds.

The other difference between a retirement interest-only mortgage and a standard mortgage is you won’t be subject to the same affordability tests. You only have to prove you can afford to repay the interest, not the capital you’ve borrowed.

Retirement interest-only mortgage vs equity release

Sounds like an equity release loan? It’s not. Both are retirement mortgages but the repayment terms differ. The key difference is that you repay the interest every month with a retirement interest-only mortgage, with the option to also pay off capital on occasion. In contrast, equity release interest can be rolled up and repaid at the end of the loan, so there are no monthly payments.

Because you aren’t making repayments with equity release the debt grows as time passes. This can mean when it is time to repay there isn’t a lot of money left in your home to pass on.

For example, if you have a property worth £400,000 and you borrow 25% – £100,000 at 5% interest. After 15 years your property is worth £500,000 and you go into care so it’s time to repay the debt.

With equity release you would have made no monthly repayments. The debt would have grown to £211,370 over 15 years, assuming it is compounded every month. After you’d repaid it you would be left with £288,630.

With a retirement interest-only mortgage you would have made monthly repayments at £416. After 15 years you would still owe £100,000 and would have £400,000 left after the sale of your home. You would have paid £74,880 in monthly interest repayments over the 15 years.

With a retirement interest-only mortgage you would have more money to pass on to your family at the end. Plus, you would have paid less interest as it wouldn’t have compounded over the years.

Get fee-free advice on retirement mortgages from a mortgage expert

Who can get a retirement interest-only mortgage?

The clue is in the name here. Retirement interest-only mortgages are aimed at older borrowers, generally 55 and above.

Because they are interest-only the low monthly repayments could suit you if you are retired but have a regular secure income. For example, from a defined benefit pension.

How much can I borrow with a retirement interest-only mortgage?

The amount you can borrow with a retirement interest-only mortgage will vary depending on the lender.

In general with both retirement mortgages and standard mortgages, you can borrow less with an interest-only mortgage than when you are also repaying the capital. This could mean you can borrow 50% of the value of your home interest-only, but you could borrow 65% if you were repaying the capital too.

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How do you repay a retirement interest-only mortgage?

There are two elements to repaying a retirement interest-only mortgage: the interest and the capital. You repay the interest with monthly payments. The capital is repaid as a result of your house being sold, either when you die or go into long-term care.

Who offers retirement mortgages for older borrowers?

In 2018 the Financial Conduct Authority (FCA) re-categorised retirement interest-only mortgages out of the equity release sector and into the standard mortgage bracket. This meant mainstream lenders could start offering retirement interest-only mortgages.

As a result, more and more providers are offering retirement interest-only mortgages. For help finding the lender who is going to offer you the best deal we would recommend speaking to a fee free mortgage broker. You can speak to one today or request a call back.

Lenders who offer retirement interest-only mortgages include:

  • Aldermore Bank
  • Leeds Building Society
  • Nationwide
  • Post Office Money
  • Saffron Building Society
  • Shawbrook Bank

Can I get a retirement mortgage?

Banks and building societies will assess a few things before offering you a retirement interest-only mortgage.

  1. Your age now – you need to be at least 55 to apply for a retirement interest-only mortgage.
  2. Your age in the future – If you wanted to get a standard mortgage lenders would assess how old you would be when the mortgage was due to be repaid. With many having a cut off of 75 this can really limit your standard options. But with a retirement interest-only mortgage there is no upper age cut off because you agree that your debt will be repaid from the proceeds of the sale of your home. That will be either be when you die or enter long-term care.
  3. Income – you need to be able to prove you have a steady, reliable income that will more than cover the interest repayments on the retirement interest-only mortgage.
  4. House value – Lenders will assess the value of your home and will only lend you a percentage of that amount. You need to have significant capital built up in your home as most retirement interest-only mortgage lenders won’t lend more than 50% of the value.

Can I switch to a retirement interest-only mortgage?

Yes. It is possible to switch a repayment or interest-only mortgage to a retirement interest-only mortgage. However, you may have to pass a new affordability assessment with the bank or building society offering the retirement interest-only mortgage.

We would recommend working out what you can afford and reading our guide to making a successful mortgage application before making the switch. That way you boost your chances of being approved.

You should also check if there are and penalties for switching away from your current lender and  how much these would be.

Get free expert mortgage advice today on what switching mortgages would cost you from our partners at London & Country

How can older mortgage borrowers prove their income?

The bank or building society considering your retirement mortgage application will need to know you can make the repayments. The specific checks will vary between lenders with some accepting different forms of income to others.

If you plan on continuing working beyond the state pension age some lenders will carry on considering earnings beyond 65.

You’ll also need to provide a company pension forecast, or annuity statement as well as your state pension statement.

Advantages and disadvantages of a retirement interest-only mortgage

The advantages:

  • Retirement interest-only mortgages allow you to continue an existing interest-only mortgage into retirement.
  • They avoid you having to downsize in order to release money from your home.
  • The loan term is not fixed. So, you don’t have to worry about repaying the capital until you are finished with your home.
  • There is no “interest roll-up”. In other words, compounding won’t erode the amount of capital you have left in your house to pass on to your family.
  • They are usually cheaper than lifetime mortgages.

The disadvantages:

  • You need to pass affordability checks to prove you can meet the monthly interest repayments.
  • Your home will be sold to repay the capital when you die or enter long-term care.
  • If you don’t make your repayments, you put your home at risk of repossession.
  • The amount you can borrow will be based upon your retirement income and the value of your home.

Our mortgage brokers can help match you with the right lender for your personal circumstances today

Leave a comment (4)* Required

  1. Bee LamontBee Lamont

    Have tried to get equity release But unfortunately because we are in a retirement apartment we have had negative interest. Now wondering if we would have any chance of an interest only mortgage

  2. terence mcgorriganterence mcgorrigan

    My wife, 70, and myself, 72, are both retired in receipt of pensions. We jointly own our home worth around £300000 with an interest-only mortgage of £180000, due for repayment 2028. There is nothing in place to repay the mortgage. We have mortgage insurance in place which will pay off the mortgage if one of us dies. We are paying £400pm mortgage and £300pm insurance. We have joint income of pensions around £20000pa. We wish to stay in our home. Any ideas?

  3. Gordon EmeryGordon Emery

    I’m still working and just starting to get my state pension I have a interest only mortgage that has come to a end so I’m trying to get a mortgage with another lender.

  4. Michael OllerheadMichael Ollerhead

    If we take out a retirement interest only mortgage and leave it until the surviving partner either dies or goes into care is there a redemption fee due out of the original amount borrowed ?

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