Two Ways To Use Your Home For Borrowing In Later Life

Russell Burns

3 mins

Two Ways To Use Your Home For Borrowing In Later Life

Homeowners aged 55 and older have a couple of unique options for borrowing money: retirement interest-only mortgages and equity release schemes.

What’s a retirement interest-only mortgage?

A retirement interest-only (RIO) mortgage is only offered on a home you own and live in. It’s pretty similar to a standard interest-only mortgage but with one big difference: the outstanding loan is usually repaid at the end of an interest-only mortgage, but RIO mortgages are only due to be repaid upon certain trigger events.

How do RIO mortgages work?

In short, you’ve got to make monthly payments that cover the interest cost of the loan. The actual amount you borrowed is only repaid when you sell the house, move into long-term care, or pass away. And how much you can borrow in the first place is down to your retirement income, rather than the value of your home, since you’d likely be making interest payments out of that regular income.

RIO mortgages can be most useful when your current interest-only mortgage is coming to an end and you’re not in a position to repay the full loan. They’re also a helpful way to free up cash for things like holidays, home improvements, and gifts to loved ones.

RIO mortgages can last anywhere between a few years and a lifetime, depending on your needs. And they can reduce the value of your estate for inheritance tax purposes too, since the value of your estate is calculated by adding up your assets and subtracting your debts – and your RIO mortgage is a debt.

Equity release

A lifetime mortgage and home reversion are the two main types of equity release. You should be aware that using equity release schemes may undermine your qualification for means-tested benefits, and that agents providing equity releases must be regulated by the FCA.

The most common equity release is a lifetime mortgage, in which you take out a loan secured against your main residence while keeping ownership of it. You’ll receive a lump sum, regular income, or both – and interest is charged on what you’ve borrowed.

When the borrower moves into long-term care or passes away, the home is sold and the proceeds are used to pay off the loan. (If there are enough funds elsewhere in the estate, they can be used to repay the mortgage instead.)

Most lifetime mortgages offer a “no-negative-equity” guarantee to ensure the home’s value is greater than the amount borrowed. You can choose to repay the interest (known as an interest-paying mortgage) or it can be added to the amount borrowed (known as an interest roll-up mortgage).

With an interest-paying mortgage, like a retirement interest-only mortgage, you receive a lump sum and make regular payments towards the interest cost.

With an interest roll-up mortgage, you receive a lump sum or a regular payment and have interest charges added to the loan amount. So while you won’t make monthly payments, your total amount owed can increase quickly thanks to the power of compounding working against you.

Home reversion is when you sell part or all of your home to a private company and receive a lump sum, an income, or both in return. You can continue to live in the property, usually rent-free, until you pass away, but have to maintain and insure it.

You can receive between 20% and 60% of the market value of your home, primarily depending on your age: the older you are, the higher the percentage. Often, the minimum age for home reversion is around 65.

While all the options provide a tax-free lump sum, the different characteristics of each may make one more suitable than the others, depending on your circumstances. For instance, RIOs usually have lower interest rates than equity-release mortgages. Certain schemes require an independent financial advisor while others don’t, but it’s sensible to discuss estate planning with your IFA before firming up your decisions.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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