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Personal Financial Planning Community

Later Life Mortgages – Financial Planning Tool or Financial Millstone?

Author: Kinnison

Published: 26 Oct 2020

The retirement landscape is changing constantly, with the retiring and retired becoming the fastest growing age group. The challenges faced during retirement across health, housing and finance continue to escalate.

With increasing competing pressures on finances many may find themselves approaching retirement with mortgages outstanding and a possible realisation that their pension may not stretch long enough to support them for their whole retired lives. However understandable the desire to stay debt free in later life may be, the alternative options of re-entering the labour market or down-sizing may be even less attractive.

The later life lending sector has recognised these challenges and evolved to provide innovative and flexible solutions designed to meet the personal needs of older homeowners. Together with financial advisers this age group should consider later life mortgages as a financial planning tool critical to an individuals’ retirement plans.

What is a later life mortgage?

A later life mortgage (‘lifetime mortgage’) is a loan secured against a borrowers’ home. The borrower retains full legal ownership of the property and usually there are no monthly repayments to make as the loan, plus rolled-up interest, is repaid when the borrower passes away or goes into long-term care. Borrowers also have the option to pay part of or all of the monthly interest. The amount of mortgage a borrower will be eligible for will depend on facts such as their age (minimum age of 55), health, value of your home and existing outstanding mortgage.

Why do clients consider lifetime mortgages?

Lifetime mortgages are a flexible financial planning tool which can be used by a borrower to release funds for a multiple of reasons, such as:

  • pay for home improvements;
  • pay for or consolidate existing debt eg outstanding mortgage, credit card debts;
  • gifting to family eg for deposit to purchase a home; or
  • pay regular bills / holiday costs

How do borrowers apply for a lifetime mortgage?

Borrowers must take advice from a qualified lifetime mortgage adviser. The adviser should take time to understand the borrowers’ personal circumstances and their needs. The adviser should then consider all the options and discuss these with the borrower. If in the advisers’ opinion a lifetime mortgage is the right solution then they should research the market and find the lender that meets the borrowers’ personal requirements. The adviser must provide the borrower with written advice and assist the borrower throughout the mortgage process.

Case Study

Background

Couple aged 62 with current interest only outstanding mortgage of £200,000 on home worth £750,000. They are considering whether early retirement is an option but are worried that they may have to sell their family home to repay the outstanding mortgage. Pre Covid, the couple had a pension fund of £500,000 which has since fallen to £400,000. Client’s financial adviser approached Kinnison to understand what options are available to the clients.

Solution

Clients have the option to refinance the existing mortgage by taking a lifetime mortgage. The rate of interest would be fixed for life at 2.85% per annum and the clients have the option to either pay part or all of the monthly interest or have the interest roll-up. The mortgage will:

  • Mortgage to remain for the remainder of their life,
  • They also have the ability to downsize in the future with the lifetime mortgage transferred to the new property.

This lifetime mortgage provides the clients with the option to take early retirement with the additional financial flexibility:

  • To stay in the existing family home;
  • To potentially delay taking a tax-free lump sum and thereby allowing the pension fund to remain fully invested for longer;
  • Without the need to service the mortgage they are able to potentially draw a lower level of income from the pension in the future thereby ensuring the pension is available for a longer period of time.

The rate of 2.85% is correct as of 15th October 2020. If the borrower repays the mortgage fully or partially early repayment charges may apply.

What should you do now?

Lifetime mortgages are available to home owners who either have an existing mortgage or who have fully paid off their mortgage. If you are retired/considering retiring or a financial adviser and would like to discuss the options available to you or your clients, our qualified lifetime mortgage adviser would be delighted to assist you. Please contact us at our website or directly at our email address; t: +44 (0)20 3871 2823 for a free no obligation initial discussion.

In the ICAEW Virtual Personal Financial Planning Conference on November 18-19 we will provide more insight into the lifetime mortgage market and delve deeper into how lifetime mortgages can be a critical financial planning tool assisting with:

  • retirement planning/cash flow management;
  • lifestyle enhancement; and
  • assisting children/grandchildren on the property ladder

The views expressed are the author’s and not ICAEW’s.

Through our relationship with ICAEW we have a dedicated mortgage advisory service for ICAEW members. Through Kinnison Limited, for later life lending for ICAEW members our fee would be £495 payable on completion (normal typical fee would be £995).

Kinnison Ltd is an appointed representative of HL Partnership Limited which is authorised and regulated by the Financial Con-duct Authority

Kinnison Ltd. Registered office: 91 Wimpole Street, London, W1G 0EF, United Kingdom. Registered in England & Wales No: 09582749.