What is a retirement mortgage and later life lending?

Key takeaways

• Retired people may still be able to get a mortgage; many lenders now accept pension income, annuities and investment income as proof of affordability.
• Retirement mortgages include Retirement Interest Only (RIO), Retirement Capital and Interest (RCI), and Lifetime Mortgages, each with different features and repayment structures.
• RIO mortgages let you pay only the interest each month with no fixed end date, keeping monthly costs low while protecting your home equity.
• Lifetime Mortgages don't require monthly repayments, but compound interest can significantly reduce the equity left for loved ones.
• Retirement Capital and Interest (RCI) mortgages require both capital and interest repayments each month, helping you reduce the loan balance over time and preserve more of your home’s equity for the future.
• Working with a specialist broker like Tembo can help you navigate different lender criteria and find the best retirement mortgage for your circumstances.

Can retired people get a mortgage?

Yes, people who have retired could be eligible to get a mortgage. Forced to save for a deposit for longer, first-time buyers are getting on the property ladder later in life. And rising house prices mean many have to stretch their mortgage term over three or four decades to make it affordable. These pressures mean mortgage terms are ending when homeowners are in their 70s.

But the change in rules also benefits existing homeowners. Now, a borrower in their 50s who is considering remortgaging to finance an extension could find a deal from a mainstream lender.

Lenders are now more willing to lend into retirement because mortgage terms are longer than they once were, and they're primarily interested in whether a borrower can keep up with repayments.

That means retirement income sources like workplace pensions, the state pension, annuities and even investment income can all count towards a mortgage application. The key is proving to a lender that the income is stable and sustainable.

What is a retirement mortgage?

In simple terms, a retirement mortgage is a loan secured against your property that either starts before you retire or while you're already in retirement. You normally choose between a capital and interest or an interest-only loan. During the mortgage term, repayments either cover the interest and reduce the size of your loan, or just pay off the interest each month.

The main types of retirement mortgages are Retirement Interest Only (RIO) mortgages, Retirement Capital and Interest (RCI) mortgages, and Lifetime Mortgages. Each works slightly differently, which is why it's important to understand the options before choosing one.

What is a retirement interest-only mortgage?

Retirement Interest Only mortgages, also known as RIOs, are a type of mortgage that's available to homeowners aged 55 and over. As the name suggests, you only repay the interest every month and not the debt. They allow people who have retired to borrow into later life, and are typically offered by a range of building societies, including both national names and smaller, regional lenders.

Retirement Interest Only mortgages come with many benefits for later-life borrowers:

• They allow people to borrow into retirement while keeping the monthly cost low, as only the interest is paid each month.
• There's no fixed end date to the mortgage. The debt is repaid from the sale of the house when the last surviving homeowner dies or moves into long-term care.
• Because the interest is being repaid, they'll also be protecting the equity in their home. When the house is sold and the debt repaid, this equity can be left behind as an inheritance to loved ones.
• The money can be used to boost pension income, remortgage for extension works, or to release equity so that borrowers can enjoy a luxury holiday or gift money to loved ones to help them get on the property ladder.

If you want to repay some of the debt when you have spare cash, you can pick a deal that allows overpayments. And if you have an unexpected windfall in the future and want to clear the debt entirely, most lenders will let you pay back the mortgage penalty-free after your mortgage deal has expired.

There are numerous banks that offer retirement interest-only mortgages, including familiar names like Santander, NatWest and Nationwide, which will all lend to borrowers who will be 75 years old at the end of their mortgage term. Metro Bank and Halifax will extend their borrowing by an extra five years to 80-year-olds.

However, each mortgage lender has different rules for older borrowers, and it can be difficult to know by yourself which banks to apply to and which could reject your application. This is where working with an expert mortgage broker comes in.

What is a retirement capital and interest mortgage?

A Retirement Capital and Interest (RCI) mortgage is like a traditional mortgage because it has a fixed end date, and you repay the debt as well as interest. The main benefit of a Retirement Capital and Interest (RCI) mortgage is its flexible upper age limit based on life expectancy. An RCI mortgage is ideal for homeowners with a generous pension income who want to remortgage but exceed the maximum age of a traditional mortgage.

Unlike a Retirement Interest Only mortgage, the debt is fully repaid by the end of the term, which means the home can be passed on mortgage-free. The trade-off is that monthly payments are usually higher because the loan balance is being reduced, as well as the interest being paid.

The right option depends on individual circumstances, including income, age and long-term goals.

Read more: Benefits of an early inheritance

What is a Lifetime Mortgage?

A Lifetime Mortgage is a type of mortgage loan secured against a home that allows you to free up some of the wealth you have tied up in your home. The loan does not need to be repaid until you die or go into long-term care, and you can still continue to live in the home. The amount you can borrow depends on the value of your home, and the loan is secured against your property.

A Lifetime Mortgage is the most common type of equity release. The amount that can be borrowed depends on the value of the home, and you can choose to receive the money as a lump sum all in one go or in stages known as drawdown.

An equity release drawdown mortgage pays out an initial lump sum and gives borrowers access to a pre-approved cash facility, which they can draw down in stages when needed. Plus, you only pay interest on the part of the loan you've actually withdrawn, so if you don't need all the money straight away, drawdown can help keep your interest costs lower over time.

Although Lifetime Mortgages are similar to Retirement Interest-Only Mortgages, there is one key difference worth understanding: how a Lifetime Mortgage can affect the equity in a home. With a Lifetime Mortgage, the interest is rolled up and added to the mortgage loan every year. At the start of the next year, the interest is calculated on the original mortgage, plus the rolled-up interest from last year.

While Lifetime Mortgages can be a useful option, there are some important trade-offs to be aware of.

• Compound interest: This means each year, the annual interest bill gets more expensive because it is calculated on a growing debt. This results in the size of the debt snowballing after several years, eating into equity and reducing the amount that can be passed on to loved ones.
• Early repayment charges: Because they are designed to be taken out for life, if a borrower wants to repay a Lifetime Mortgage before they die, they'll be charged a penalty. However, there are lots of new deals that come with flexible features that allow overpayments or early repayments in certain circumstances. It's worth reviewing a plan's features carefully before you commit.
• Higher interest rates: Equity release interest rates are also higher than traditional and RIO mortgage rates. However, equity release lenders sometimes offer fixed rates for life. This can be great news for those taking out equity release when rates are low, but not so great when rates are high!

How to get a mortgage in retirement

Getting a retirement mortgage works much like any other mortgage application; a lender will assess eligibility and affordability before approving it. Lenders are primarily concerned with an applicant's ability to keep up with repayments, rather than whether they're still working. 

For example, with a Retirement Interest-Only mortgage, applicants usually need to prove to the lender that they can afford the monthly interest payments on retirement income, not salary. Borrowing is also typically restricted to around 45 to 50% of your property's value.

For joint applicants, the affordability test can be tougher. Most, but not all, lenders want to make sure that the mortgage would still be affordable if one partner or spouse dies. This is known as a sole-survivor affordability check, and it's something a good mortgage broker can help you navigate.

Every lender also has different criteria that applicants need to meet, so it can be difficult to know what you're likely to qualify for and who to apply with.

Common income sources lenders may accept include:

• workplace or private pensions
• the state pension
• annuity income
• investment or rental income

That's where working with us at Tembo comes in handy. Our award-winning mortgage advisers will search across the market to find the best deal for you, including options you might not find on the high street.