We covered how equity release should work last week, and we had a few reader queries around how home-owners, who still have a mortgage after retirement, might be able cope. I’ll lay out options here to help you decide.
Nearly 500,000 people still have a mortgage after retirement and research shows they have a home worth £320,000 and a household income of £30,000. For some that income is enough, for others it’s not. For others, the bills mount up for home improvements or holidays that they just cannot afford especially after the extraordinary rise in the cost of living. So, what are the options if you want to pay off the mortgage after retirement and still live?
You could downsize but you will need to see what that means in terms of what you net from the sale. For example, the difference between the value of a semi-detached house and a flat or maisonette is less than 20%.
You then have the cost of moving to take away from that, which can be around eight to nine per cent. You are therefore left with 11% of the value to repay the debt that is still owed. Downsizing to free up the cash may be too expensive, and you can have emotional or physical ties to their homes and neighbourhoods.
You can work out your own numbers and feelings around all of that, as they will be very personal to you, but be sure to think it through and write it down.
The Equity Release Council has shown that near 40% of ‘later life’ mortgages are seen as more common or acceptable by consumers.
If your bank is seeking you to repay your loan, you can first look at a Retirement Interest Only (RIO) loan. This means you borrow the money and just make the monthly interest payments which lowers your overall payments and cashflow. You can apply for a RIO from age 50 to 80 and sometimes beyond.
A RIO is different from an equity release, or lifetime mortgage in that you must prove affordability, and you have to service the loan ie: pay the interest, but it allows you to borrow what you need to repay your mortgage, move from capital and repayment to lower your payments, and keep the mortgage level by servicing it.
If you didn’t want to make monthly payments, by being payment-free, you could apply for a lifetime mortgage. With this, you borrow the money and let the interest roll up as explained last week.
As a direct comparison, a RIO rate right now is around 5.19% for a five-year fixed and a lifetime mortgage is 5.95%. The 5.95% rate will stay at that level for good, but after five years the RIO will revert to the market rate at that time which could be higher or lower.
If you had gone for a RIO, and rates were higher when you came out of the five-year deal, you could opt for a lifetime mortgage at that point.
It’s worth bearing in mind that the older you are, the lower the lifetime mortgage rate is, so it could be a good strategy to start with a RIO and then port over to a lifetime mortgage later. Imagine also that bank rates fall over the next few years, you could then opt for a lifetime mortgage which would be fixed at the new lower level. (reverse is also true).
Remember with a lifetime mortgage, you have a choice to pay the interest that is accruing rather than it eating into your equity, or you can let it roll up.
I overheard a conversation with someone panicking about how they might repay their mortgage, and that stress was getting to them. I pointed out that of course they could create a lifetime mortgage and pay off the debt and then let that loan roll up. They get to live in the home payment free and allow the interest to roll up which will be paid off on death or moving into a home. It dawned on them that they therefore had security no matter what - a big stress reliever. Their children added that all they were doing was panicking to pay money back that would only be going to them.
- Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. For a complimentary guide on equity release, call 028 6863 2692 or email info@wwfp.net
