Introduction to Later Life Lending

Retirement Interest Only (RIO), Lifetime Mortgages & Home Reversion ?

All three are types of lending available for over 55s and broadly termed Later Life lending. Mistakenly the term equity release is also used as an alternative for historic reasons for this sector.  Later Life lending products have evolved considerably and provide many options for those in retirement or close to retirement to raise capital from their property.  Equity Release products are one part of the sector. 

These loans allow people to borrow when traditional mortgages are not available, such as due to age or lack of earned income.  Modern Later Life lending mortgages comes with options to repay the loan with capital & interest or interest only.  So the value of the property is not eroded by capitalised interest and allows more of the value to be passed on to the next of kin.  However, for those whose most pressing need is to secure a home without the cost, no interest payment option is also available.

Product Summary

Older parents and child playing in park
Retirement Interest Only (RIO)

Borrowing is based on income and affordability.   Therefore the loan will depend on: 

  • Permanent income in Retirement - pension, rent or investment.
  • Credit Score
  • Credit & Loans
  • Other fixed expenditure
  • Number of Financial Dependents
  • Loan repayment : interest only.
Retirement home and garden bought with equity release
Equity Release Type 1: Lifetime Mortgage

Borrowing is NOT based on income but on the equity in the property.  However, the loan is based on age (of the younger with joint applications). 

  • Repayment options: capital & interest, interest only or interest roll-up.
  • 20% LTV at age 20 rising to 55% with age.
  • Higher LTV with impaired health
  • Inheritance guarantee
A thatched house set near a bridge
Equity Release Type 2: Home Reversion 

Based on equity in the property and not on income.  No payment of interest or capital is required. On death the property is sold to recover loan & interest. 

  • Interest is rolled-up or capitalised.
  • LTV based on age and health.
  • Adverse credit accepted.
  • No restriction on fund usage.
  • Based on selling 20% to 100% of the value to the lender. Any remaining value inherited.

What can you a use Lifetime Mortgage for?

  • Debt repayment – there is no restriction on how the money can be used. Interest on accumulated credit is often high and a burden to many. One off financial injection can be used to clear all debt.
  • Day to day living – help with a loss of a pension income from a death of a partner or the erosion of living standards with fixed pension income.
  • Financial help for family – grandchildren’s education, deposit for a family member.
  • Remortgage an interest only mortgage – many interest only mortgages coming to end of the term can be remortgaged to an interest only mortgage.
  • One off life events – cruise holiday, new car, special family visits.
  • Medical emergencies – such as private funding for an organ transplant.
  • Later life expenses – delay long term care.
  • Reducing inheritance tax.
  • Unexpected home emergencies – replacing a boiler, roof repair etc.

Who is it for?

Equity release can be a way for those in retirement with equity in the property to raise capital. Equity release loans are based on equity in the property and not on earned income (except one type) so proof of income is not required. Those with low levels of adverse credit can also qualify.

All Equity Release plans allow you to remain in the property until death or moving on to long term care. You can elect to pay no interest, part interest or all of the interest of the loan. If no interest is paid, it is added to the loan or rolled up (see later).

Funds are tax free and can be used for any legal purpose. Funds can be released up front or in stages. Lifetime mortgages are not based on income, but age and allows those in poor health to borrow additional amounts.  

Equity release is a big decision and may not be the only or the best way to raise capital for your circumstances. There may be alternatives you can consider – download our guide: Alternatives to equity release.

Inheritance and Equity Release.

Before you make a decision it is important to consider how the value of your home can change in the future. This can affect the level of inheritance you are able to leave the dependents or the family, and also whether you will be able borrow more money in the future.

  • UK house prices over the last 50 years* (1959 -2009) have grown by 2.7% a year, after inflation is taken in to account (which is a better measure of actual growth).
  • The average growth in real earnings for the same period is 2%.
  • UK house price growth from 1991 – Jan 2020 has been 5.1% (after inflation) per year**.

*Lloyds Bank UK Housing Market Survey Jan 2010
**Nationwide House price index 2020.

Below shows how change in house price can affect future value of a property and then the equity left for inheritance.

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Our experienced advisers can guide you through the advantages and disadvantages of equity release and if it is a suitable option for your circumstances.  Contact us: 07507895365

Product Details

Older parents and child playing in park
Retirement Interest Only (RIO) Mortgages.

Similar to traditional mortgages as they are based on income and affordability, but only post retirement income is considered.  Types of income can be any income that is taxable: Pension, Investment and rental.  Some types of guaranteed benefits will also be considered. 

  • Interest Only monthly payments.  Non-payment of interest not allowed.
  • Early Repayment Charge (ERC) during rate control period only.  Rates are available for various periods, e.g. 2, 5, 10 & 15 years. 
  • Loan repaid through sale of property on death or a specified event such as entering Long Term Care (LTC).  Any remaining inherited by next of kin
  • Maximum 2 applicants per household.
  • For joint applications, income is based on the younger applicant and any transferrable income between the applicants. 
  • When applying pre-retirement, only evidenced post retirement income used, such as projected retirement and investment income.  
  • Minimum age 55; Maximum age at application vary with lender; No limit on term.
  • Capital raising for non-property related purposes allowed.
  • No second charges allowed.
Retirement home and garden bought with equity release
Equity Release Type 1: Lifetime Mortgages

Unlike traditional mortgages the loan is not based on income, but on equity in the property.  Therefore no affordability tests are used for lending.  However, the maximum loan is restricted by age.   

  • Monthly repayment options are capital repayment, interest only and non-payment of interest.  With non-payment, interest is added to loan i.e. capitalised.
  • Early repayment charges (ERC) apply.  No ERCs at death or a specified life event such as entering a carehome,  Any loan outstanding is to be repaid through the sale of property. Any remaining inherited by next of kin.  ERCs can vary from lender to lender.
  • Rate is fixed for the whole term of the mortgage.  
  • Maximum 2 applicants per household.
  • For joint applications, age of the younger applicant is used to determine maximum loan.
  • Adverse credit accepted.
  • Minimum age 55; Maximum age at application vary with lender; No limit on term.
  • Capital raising for non-property related purposes allowed.
  • No second charges allowed.
A thatched house set near a bridge
Equity Release Type 2: Home Reversion Mortgage

Specifically designed when there is no need for an inheritance or no monthly payments are desired.  The loan is based on selling a proportion of the property to a lender.  The amount is determined by the age, value and proportion sold.  Therefore no affordability tests are used for lending.  However, the maximum loan is restricted by age.   

  • No monthly repayment.
  • You sell 20% – 100% of the property to lender.
  • Right to live at the property until death or the need for Long Term Care (LTC). 
  • Maximum 2 applicants per household.
  • For joint applications, age of the younger applicant is used to determine maximum loan.
  • Adverse credit accepted.
  • Minimum age 55; Maximum age at application vary with lender; No limit on term.
  • Tax free capital raising for non-property related purposes allowed.
  • No second charges allowed.
Useful links

Property search sites:

On the Market
Right move
Residential People – free to list portal
Zoopla

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