Why choose a Retirement Mortgage over Equity Release?

Why choose a Retirement Mortgage over Equity Release?

When people in later life borrow money against their property, should they opt for traditional equity release or an interest-only retirement mortgage? It depends on their circumstances, says Duncan Buchanan, Banking Director at Hampden & Co. If they’re borrowing out of choice rather than necessity, he believes it’s retirement mortgages all the way.

For more than three decades, scientists at Finland’s University of Jyväskylä have been carrying out tests on people in their late 70s. Every time they check a new cohort, they note significant advances – findings that are backed up by research elsewhere in the world. Men and women aged 75-80 now have significantly stronger muscle strength, reaction speed, reasoning abilities and working memory than previous generations. Most 75-year-olds today are much ‘younger’ than their grandparents were at the same age.

What has this got to do with retirement mortgages? Well, quite a lot actually. In the UK, older high-net-worth clients are often living a full life and are less inclined to downsize from their family home. In terms of their finances, they may have a strong investment portfolio or the sort of final-salary pension scheme that their children or grandchildren could only dream of. And in many cases, they may still be working – not because they need to, but because they enjoy it.

Meanwhile, as property price inflation continues to outstrip salary increases, they see younger members of their family struggling to get a foot on the property ladder – and they want to help.

That could mean cashing in on some of their investments. But if their wealth manager is doing their job properly, the return on those investments should be something that they’re reluctant to abandon, particularly when capital gains tax comes into play. So, attention may then turn to what is often their biggest asset – their home, and the option of equity release.

We know that traditional equity release is attractive for those who need to raise money for their retirement, perhaps through a pension shortfall. But clearly, it can come with risks and caveats. Obviously, the interest rolls up, and you end up paying interest on interest, which can prove significant as it eats into the equity of your property. Indeed, if someone taking out equity release in their 60s lives into their 90s, there may be nothing left to hand on to the next generation when their life comes to a close.

For clients in the fortunate position of approaching later life borrowing through choice rather than necessity, it would be difficult to suggest that traditional equity release is a good option to pursue. In these circumstances, a much more attractive alternative is an interest-only retirement mortgage, where the client retains the certainty of protecting their equity.

Of course, with this product, they will initially pay a higher rate of interest than is charged on an equity release mortgage, but they will pay less interest in the long term. Furthermore, for many of our clients, the interest they pay on a retirement mortgage is likely to be lower than the return being generated on their investment portfolio, making it a better choice than cashing those investments in.

That frees them up to gift money to children or grandchildren, and the reassurance of knowing the equity that is left in their home helps significantly with general financial planning and practical conversations with the wider family.

Incidentally, when I’ve arranged retirement mortgages for clients, I’ve often worked closely with their wealth manager. If good financial planning is all about helping people to get to wherever they want to be while protecting their wealth, this type of mortgage fits in well.

A number of the clients that have approached me about interest-only mortgages had also initially been knocked back by mainstream lenders. For instance, they may have taken out an interest-only mortgage several years ago and are then instructed to repay the balance at the term’s end. When they ask for a mortgage extension, they’re told that they’re too old – even though they may still be working and have a good income.

Larger lenders will probably say that they need these cut-off points due to the sheer volume of mortgages they’re processing. But people fall through the gaps, which is where smaller, more flexible lenders can help.

In our case, clients who are still working in later life can take out an interest-only mortgage. And if they’ve retired, they can take out a retirement mortgage. The rates are similar and there's no cliff edge when it comes to the number of candles on their birthday cake. After all, the research shows that 80-year-olds are sharper now than ever.

Duncan Buchanan is a Banking Director based in our Edinburgh office.

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