Owning a home is a dream come true; paying a capital and repayment mortgage in retirement however can be a nightmare for most pensioners. Certain organisations offer mortgage plans where you only pay interest, which makes it easier for you as a home owner to make the monthly payments. Pensioner mortgages are therefore becoming increasingly popular and the interest only lifetime mortgage route seems to be the key. Applying for one of these products is often based on your life expectancy, age, and current home.
Features of the interest only mortgage
Money lenders assign a period of years for an interest only mortgage plan. You as a borrower are required to make monthly payments on the interest over the estimated term of your loan. The term is estimated as the plan will continue for the remainder of one’s life and as yet no one can accurately judge what life expectancy is for anyone!
This basically means that you do not have to pay any money off the principle amount; nevertheless you are repaying the interest generated by the charge levied on the capital each month. This ensures the capital element will always remain constant, providing payments are maintained.
Until recent regulations changed on mortgage lenders providing their customers with an interest only mortgage, some people may be trapped between the old and new regimes. The issues arising here are what can one do when one needs to take additional funds via a further advance or moving house?
What of the past?
Many people have previously been granted an interest only mortgage running well into retirement with no repayment vehicle in place. However, from experience those same mortgagors now needing amendments to this plan find they have to adapt to the new regime of the mortgage lender. This creates a major problem.
Under the new regulations, the client usually has to have the pay off on the new mortgage by the time they are 75. Unless the provider offers an interest only lifetime mortgage then it must also be on a capital and repayment basis. Difficulties therefore will arise when someone age 65 then has to pay off a £50,000 mortgage by the time they are 75! Affordability will be the issue as monthly payments of paying off £50,000 over 10 years will be outside the realms of most pensioners.
Next we discuss the interest only mortgage options available to pensioners with mortgages that now need to meet their future retirement objectives.
If you are in a situation where you need to pay off the interest-only lifetime mortgage by 75, you may need to seek a different equity release plan. The key is in home reversion.
Home Reversion to Pay off Interest Only Lifetime Mortgages
Home reversion can be obtained when you are 65 years or older. It cannot be obtained if you have an outstanding mortgage, unless the amount being sold covers that mortgage for the payoff. If you have a low interest only lifetime mortgage principle balance, then there is a possibility of selling a portion of your home to pay for it and gain retirement funds. It is not an ideal choice.
Other Choices with New Policies
Since most interest-only products under lifetime mortgages are only good for 10 years, you may want to re-evaluate your life expectancy and workable retirement age. In fact in the United Kingdom many homeowners are waiting to retire until they are closer to 70 in order to keep money coming in.
With part-time jobs and their pensions they can live on their income during their early years. When working becomes too difficult then it is time for the interest-only lifetime mortgage on the thought that one’s life expectancy will be smaller even within the 10 year mark of paying off the interest-only lifetime mortgage.
It is never pleasing to consider that a new loan will have to replace an old loan; however, that may be your only option when you take out an interest only lifetime mortgage that requires repayment within 10 years. The key to such a regime is ensuring your housing value will support the new loan as well as cover your pensioner needs for quality life in your later years.
Speak with a financial expert to determine which products will better suit you among the available interest-only lifetime mortgages. Also use a calculator to assess the affordability of such an option based on your life expectancy. It is not something you can pinpoint with certainty, but often family history shows life tendencies.