What is later life lending?

Later life lending is a term used to describe several types of borrowing designed for individuals, typically over the age of 55.

Why do individuals use later life lending?

Later life lending can be used for most legal reasons from purchasing a main home, 2nd home or buy to let property to re-financing a property to pay off current debts, reduce monthly payments, support pension income, fund care costs or fund lifestyle requirements, such as home improvements, holidays, large purchases, family needs, or inheritance tax planning.

What types of later life lending products are there?

Later life lending can be split into 3 main products, which are all types of mortgages:
1. Traditional mortgages
2. Retirement interest only mortgages
3. Equity release – lifetime mortgages

1. Traditional mortgages

Traditional mortgages are available from banks and building societies. Individuals will be required to complete an affordability assessment and agree to make set monthly payments.

These mortgages come with a set term (usually up to retirement age) and individuals choose between capital repayment and interest only:

  • Capital repayment means the individual will pay off the interest and some of the capital each month, meaning that at the end of the selected term there will be no outstanding balance.
  • Interest only allows the individual to pay just the interest each month, however at the end of the term, they will need to repay the outstanding balance.

Traditional mortgages come with either fixed or variable Interest rates:

  • Fixed rates are generally fixed for a period between 2 and 10 years and come with early repayment charges during the fixed period.
  • Variable mortgages are either based on the lenders standard variable rate or the Bank of England base rate and generally come without early repayment charges.

These mortgages also come with the ability to overpay (generally up to 10%) of the capital balance each year without early repayment charges applying. Overpayments can be made regularly, as a one-off payment or on an ad-hoc basis.

2. Retirement interest only mortgages

Like traditional mortgages, retirement interest only mortgages require an affordability assessment. However, the individual is only required to make the interest payments each month. The outstanding balance is only repaid when the last applicant dies or enters long term care, usually by sale of the property.

Interest rates on these mortgages can either be fixed for a set term; for example 2 or 5 years or for life and there will be early repayment charges either for the set term or for a period if a lifetime fix is selected.

These mortgages also come with the ability to overpay some of the capital balance each year without early repayment charges applying.

3. Lifetime mortgages

Lifetime mortgages don't require an affordability calculation or any monthly payments. The interest is rolled up over the loan and the total outstanding balance is repaid upon the death or entry into long term care of the last applicant, usually by the sale of the property.

Lifetime mortgages come with a "no negative equity guarantee" which means that the amount owed at the end of the loan will not exceed the value of the property.

Interest rates on these mortgages are set at outset for the duration of the mortgage and come with either variable or fixed early repayment charges:

  • variable early repayment charges are for the term of the loan and are based on long term gilt rates
  • fixed early repayment charges apply for a set period at the start of the loan such as the first 7 or 10 years

Lifetime mortgages also offer the ability to make payments without early repayment charges applying either by agreeing to make a regular payment against the interest which can range from £25 to 100% of the monthly interest payments, or by making overpayments against the capital balance subject to agreed limits.

Lifetime mortgages can also come with a number of other features such as:

  • drawdown – the ability to take an initial lump sum, then set up a reserve fund which can be accessed at a later time
  • inheritance guarantee – the ability to ring fence part of the property for Inheritance
  • downsizing protection – the ability to downsize without early repayment charges applying

Later life lending comparison

TypeTraditional mortgage Retirement interest only mortgageLifetime mortgage
Purchase Yes Yes  Yes
Remortgage Yes Yes  Yes
Affordability calculation Yes Yes  No 
Set repayment term Yes No No
Loan repaid on death or entry to long term care No Yes Yes
Capital repayment Yes No No
Interest only Yes Yes No
Interest roll up No No Yes
Overpayments Yes Yes Yes
Interest servicing No No Yes
Interest rate fixed for life No Yes Yes
Interest rate fixed for set period Yes Yes No
Variable interest rate Yes No No
Early repayment charges Yes No No
Portable Yes Yes Yes
No negative equity guarantee No No Yes
Inheritance guarantee No No Yes

Note

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.

All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.

This website is intended for financial advisers only and shouldn't be relied upon by any other person. If you are not an adviser please visit royallondon.com.

The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.