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12 Jan 2019

New part-interest-only mortgages launched for older borrowers

Hinckley & Rugby joins the growing number of lenders offering help to those nearing the end of an interest-only mortgage

Hinckley & Rugby Building Society (HRBS) has launched two new part-interest-only, part-repayment mortgages for older homeowners.

The products join a growing number of solutions for people who are retiring without having cleared their existing home loan, including thousands who are approaching the end of an interest-only mortgage without a means of paying the capital off.

So, how does HRBS's retirement mortgage work, and could it be suitable for you? We explain everything you need to know including the alternatives, from retirement interest-only (RIO) mortgages to equity release.

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HRBS offers retirement mortgages on part-interest-only basis

Since the FCA opened the door to interest-only lending to retirees last year, several lenders have launched products designed to bridge the gap between traditionalmortgages and equity release.

On Monday, HRBS launched two products that fit into this niche: the 'Later-life two-year fixed-rate mortgage' (2.99% APR) and the 'Later life lifetime discount mortgage' (2.79% APR).

Both are available on a part-repayment, part-interest-only basis (though they can also be taken out on a purely repayment basis).

For buyers who are downsizing, 50% of the loan can be interest-only, while for people whose proposed repayment vehicle is the sale of another property, the interest-only element can constitute up to 60% of the loan.

The maximum loan-to-value (LTV) on both products is 80%, and the mortgage term must end when the borrower is aged 75 or above. No early repayment charges apply.

How do retirement mortgages work?

You might have heard people talking about retirement interest-only mortgages or 'RIOs'. This has become something of a catch-all term used to describe a complex, rapidly expanding and innovative part of the mortgage market.

Some building societies, including Leeds, Bath and Tipton & Coseley, are offering interest-only mortgages with indefinite terms. With this type of deal, you'll pay a set amount of interest every month until you die or go into long-term care, at which point the property will be sold and the capital repaid.

Other lenders, including Aldermore Bank, Loughborough Building Society and Post Office Money, are offering retirees interest-only mortgages with set terms.

It's difficult to compare deals directly as they all come with different limitations and requirements. Some RIO mortgage providers stipulate a minimum property value; others will only lend at a very low LTV (e.g. 30% with the Post Office); some specify a minimum and/or maximum applicant age and others are more relaxed.

Is equity release a viable alternative?

The use of equity release schemes dramatically increased last year, with the amount of cash released from property in the third quarter alonehitting £1bn for the first time.

While some equity release customers use the money to fund home improvements (50%) or help out younger family members (16%), around 35% use it to pay off an existing mortgage, according to investment firm Canada Life.

However, equity release is expensive and complex and you should talk to an independent expert before applying.

The two main types of equity release

Equity release enables you to release cash from your home, with the loan only being repaid when the property is sold upon your death or if you go into long-term care.

It takes two main forms: by far the most common is thelifetime mortgage, where you won't make any repayments at all from month to month, meaning that interest is added to your debt and therefore charged on an ever-growing sum.

Home reversion schemes involve you selling a stake in your property for a cash lump sum. You will generally be paid a lot less than the share is worth, for example you might sell a 70% share but only be paid 20% of your home's value.

The share you've sold will remain as a percentage, meaning that if your property's value increases, so does the stakeholder's claim on the sale proceeds when you die.