My husband and I have an interest-only mortgage that finishes in four years. We are 60 and 69 years old respectively and want to look at options for a new mortgage. We both have regular incomes, but not enough savings to pay off the capital on the mortgage.
What choices do we have?
Interest-only mortgages work exactly as the name suggests and monthly payments only cover the cost of the interest charged on the mortgage. As a result, the mortgage balance is not reduced bit by bit each month and the entire sum will still be outstanding at the end of the mortgage term. The idea is to then set up a separate repayment vehicle such as a Stocks and Shares Isa, where monthly contributions can be made with the aim of growing adequately over the life of the mortgage to pay it off at the end of the term.
If the growth of the repayment vehicle is not adequate to hit the target amount, or if there isn’t a repayment strategy in place, it can leave borrowers faced with having to extend the life of the mortgage or even to sell the property to repay the debt.
Extending the life of the mortgage has been harder for older borrowers in recent years. Many lenders restrict the maximum age at the end of the mortgage term, often to 70 or 75. That can seriously limit you choices and the maximum term, while switching to a repayment mortgage over a short term can present affordability issues.
However, lenders have become more flexible recently and have, in some cases, extended the maximum age at the end of the mortgage term.
Smaller building societies and more specialist lenders have often been more open minded, as long as the mortgage will be affordable and sustainable. For example, Family BS and Hodge Lifetime can consider lending up to a maximum age of 95, while a number of others can consider lending to borrowers who are well into their 80s.
A more recent development that could offer an alternative is retirement interest-only mortgages. These are taken on an interest-only basis with the intention of being repaid by the sale of the property, whether that is on death or a move into long-term care. That means that there isn’t the usual defined timeline of a traditional mortgage when the loan must be repaid, removing the deadline for repayment of the capital balance.
These are aimed specifically at older borrowers but will require them to prove the mortgage will be affordable, as monthly interest payments must be met. Product options remain fairly limited at the moment with lenders such as Leeds BS, Tipton and Coseley BS, Hodge Lifetime and Bath BS among those to launch retirement interest-only deals.
Alternatively, more traditional equity release options, such as lifetime mortgages, can allow the interest to roll up – again,with payment on death, moving home or into residential care – so that there is no monthly payment required.