This week, an expert mortgage broker explains the pros and cons of applying for a retirement interest-only mortgage as a retiree.
Q. My husband and I, both retired, have been considering freeing up cash from our home by taking out an interest-only mortgage on it. What are the pros and cons of this type of product?
David Blake, Which? Mortgage Advisers expert, says:
As these products have no defined end date – you simply keep making monthly interest payments until you either sell the house, move into long-term care or die – they could potentially give you more flexibility with your future plans, for example if you decide to downsize.
They could also help mortgage prisoners who have been unable to remortgage with other lenders.
As the money is lent on an interest-only basis, those who wish to minimise their mortgage outgoings and use their money elsewhere would potentially benefit from this type of product.
As you’re both retired, any potential mortgage lender would want to make sure their lending is sustainable both now and into the future. This means that if you’re applying for a joint mortgage, the lender will want to know what the financial impact would be if one of you were to pass away.
In many cases, the lender will also insist that independent legal and tax advice has been taken and plans have been made to repay the mortgage in the future.
Pros and cons of interest-only mortgages on residential properties for retirees
- There is no definitive end date when the loan has to be paid back, enabling you to keep your options open
- The borrowing is on an interest-only basis, and the monthly payments are likely to be lower than if you had a repayment mortgage.
- Cost: rates for this type of lending could be higher than for a standard repayment mortgage
- This type of mortgage could also be more expensive than a standard interest-only mortgage with a set term, should you have it for a longer period.
What are the alternatives?
You might want to consider a standard mortgage with a definitive end date, either repayment or interest-only.
Another option is equity release in the form of a lifetime mortgage. Here, you don’t make any payments at all – but as the interest you owe gets added onto the debt, interest is charged on an ever-increasing sum and can quickly spiral.
If you’re interested in equity release, the Which? Money Helpline can help with information about how it works, eligibility and more.