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14 Mar 2019

Homeowners pay mortgages into 70s: could a retirement interest-only mortgage help?

Growing retirement interest-only mortgage market takes on traditional equity release

The average UK homeowner is still paying off their mortgage past the age of 75, according to the latest Tax Incentivised Savings Association (Tisa) and KPMG Savings Index, which gives a snapshot of the total savings held by British households.

New figures reveal that 55-64 year olds had £36,500 left to pay on their mortgage, 64-75 year olds owed around £11,400 on their mortgage and those over 75 were still paying off mortgage debts of £3,200.

The findings bring into question the long-held assumption that your mortgage will be paid off by the time you reach retirement, with many UK households now relying on their pensions to pay off their mortgage.

Here, we explain why people are taking longer to pay off their mortgages and take a look at retirement interest-only mortgages and the otherlater-life borrowingoptions available.

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Why is it taking longer to pay off a mortgage?

The Tisa and KPMG Index revealed that the financial landscape is changing and having a direct effect on the ability of borrowers to clear their mortgage debt.

Overall, first-time buyersare entering into the property market later and opting for longer-term mortgages. This means that many are carrying mortgage debt into retirement and having to rely on their pensions to pay it off.

A shift in the types of workplace pension schemes offered to employees, however, is affecting the amount of retirement income borrowers have - and thus their ability to pay off their mortgage.

The number of defined benefit (DB) pension schemesavailable to employees is in decline, especially for younger private sector workers. DB pension schemes are really advantageous for employees because pension companies are obliged to meet a 'pension promise' and pay out a set amount of pension income when you retire, regardless of how your pension investment performed.

Defined contribution (DC) pension schemes, which are far more common these days, do not promise to pay out a set amount at retirement. This means that the amount you get depends on how much you contribute to your pension and how the fund itself performs.

Renny Biggins, retirement policy manager at Tisa, said: 'We've seen a real shift in pension provision in the past few decades, with the private sector moving towards defined contribution schemes and people failing or unable to save appropriate amounts via other long-term saving vehicles.

'The fact is many people about to enter retirement still have a sizeable chunk of their mortgage left to pay. Although auto-enrolment is a positive step forward, it remains a challenge for people in the UK to build up sufficient retirement savings.'

Could retirement interest-only mortgages (RIOs) help?

Retirement interest-only mortgages (Rios) are designed to help older borrowers who may struggle to get a standard residential mortgage.

They allow you to borrow against your property and only pay back the interest (and not the loan itself) each month. Some Rios carry terms, meaning you pay back the capital loan after a set number of years or when you reach a certain age, but with most deals you'll only repay the capital when you sell your property, move into residential care or pass away.

Rios can also be an option for homeowners who are finding it difficult to remortgage from a standard interest-only mortgage, including thousands of borrowers who took one out before the financial crash, when the deals were often sold to people without thoroughly checking whether they'd be able to repay the loan.

Some retirement interest-only mortgages allow you to repay some capital as well as interest. This will cut down the size of your loan over time, meaning that more of your property can be passed on to your loved ones.

New retirement interest-only mortgage deal launched this week

The Beverley Building Society has become the latest lender to launch a Rio mortgage, offering loansto people over the age of 55 who are receiving pension income.

The lender hasn't set a minimum income requirement and you can borrow up to 3.5 times your income (or combined income, if you're applying with someone else).

Beverley Building Society's interest-only deal gives you the option of overpaying by 10% of your mortgage's balance each year without incurring a penalty. After that there's a 2% early repayment charge.

Your property must be worth at least £125,000 to apply, and the loan can be for anything between£25,000 if you're purchasing (or £40,000 if you're remortgaging) and £350,000, with a maximum loan to value (LTV) of 55%.

Your loan will be paid off through the sale of your home when you move into full-time care or pass away, unless you take out a joint mortgage and the other person continues to live in the house and can afford the interest payments by themselves.

For more information about how these mortgages work and to find out about other deals on the market, check out our retirement interest-only mortgage guide.

How does equity release compare to RIOs?

Retirement interest-only mortgages share some similarities withequity release, as both allow you to borrow against your property's value to access cash in retirement.

There are two main types of equity release:lifetime mortgages and home reversion schemes.

Lifetime mortgages let you borrow a portion of your home's value, with interest accruing on the amount you've borrowed (and on the interest itself) over time. On the plus side, you don't have to pay anything back until you sell your home or pass away, but on the downside, the amount of interest owed can quickly spiral and eat into your remaining equity.

Home reversion schemes allow you to sell a share of your home while still living in it.

The major drawback is that the provider will pay you far less than the share is worth, but profit from the full value of the percentage that they own when the property is eventually sold (which usually happens when you move into long-term care or pass away).