Hinckley & Rugby Building Society (HRBS) has launched two new part-interest-only, part-repayment mortgages for older homeowners.
The products enroll in a growing number of solutions for people who are retiring without having cleared their existing home loan, including thousands who're approaching no more an interest-only mortgage without a means of paying the capital off.
So, how does HRBS’s retirement mortgage work, and may it be ideal for you? We explain all you need to know including the alternatives, from retirement interest-only (RIO) mortgages to equity release.
HRBS offers retirement mortgages on part-interest-only basis
Since the FCA opened the door to interest-only lending to retirees this past year, several lenders have launched products made to bridge the gap between traditional mortgages and equity release.
On Monday, HRBS launched two items that fit into this niche: the ‘Later-life two-year fixed-rate mortgage’ (2.99% APR) and also the ‘Later life lifetime discount mortgage’ (2.79% APR).
Both are available on the part-repayment, part-interest-only basis (though they are able to also be removed on a purely repayment basis).
For buyers who are downsizing, 50% from the loan could be interest-only, while for people whose proposed repayment vehicle is the sale of another property, the interest-only element can constitute as much as 60% from 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 may have heard people talking about retirement interest-only mortgages or ‘RIOs‘. It has become something of a catch-all expression used to explain 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. Using this type of deal, you’ll pay a set amount of interest each month until you die or get into long-term care, after which the property is going to be sold and the capital repaid.
Other lenders, including Aldermore Bank, Loughborough Building Society and Mailbox Money, are providing retirees interest-only mortgages with set terms.
It’s hard to compare deals directly as they all include different limitations and requirements. Some RIO mortgage providers stipulate the absolute minimum property value; others will only lend in a really low LTV (e.g. 30% using the Mailbox); some specify the absolute minimum and/or maximum applicant age and others are more relaxed.
Is equity to produce viable alternative?
The utilization of equity release schemes dramatically increased this past year, considering the variety of cash released from property in the third quarter alone hitting lb1bn the very first time.
While some equity release customers make use of the money to fund home improvements (50%) or help out younger family members (16%), around 35% utilize it to pay off an existing mortgage, according to investment firm Canada Life.
However, equity release is pricey and sophisticated and you ought to talk to a completely independent expert before applying.
The two main kinds of equity release
Equity release enables you to release cash from your home, with the loan only being repaid when the rentals are sold upon your death or if you go into long-term care.
It takes two main forms: probably the most common is the lifetime mortgage, in which you won’t make any repayments at all from month to month, meaning that interest is put into your financial troubles and therefore charged on an ever-growing sum.
Home reversion schemes involve you selling a stake in your property for any cash lump sum. You'll generally get paid a lot less than the proportion is worth, for instance you might sell a 70% share only be paid 20% of your home’s value.
The share you’ve sold will stay as a percentage, meaning that if your property’s value increases, the same is true the stakeholder’s claim around the sale proceeds whenever you die.
