How Just Mortgage Brokers Can Help You
Once upon a time, accessing a full spectrum of mortgage options used to be out of the question for those over the age of 60. Today, some lenders are raising upper age limits and making a wider variety of products available to over 60s, including the opportunity to make use of an interest only mortgage.
What is an interest only mortgage?
An interest only mortgage, in its most basic form, does exactly what it says on the tin: mortgage users only pay back the interest on their loan until the end of the loan period – then pay off the capital using a pre-agreed source of finance (known as a repayment vehicle).
For individuals over 60 years of age, these repayment vehicles might be a pension scheme, for others, it may be having a concrete expectation of receiving a significant sum of money before the end of the mortgage term, or a plan to even sell the property and downsizing or moving in with relatives.
Understanding the rules for over 60s
The rules surrounding the type of repayment vehicle you could use tightened up significantly with the introduction of the Mortgage Market Review (MMR) in 2014. This significant change to mortgage lending rules was a response to the liberal lending which contributed to the house price boom and bust of 2007/2008.
Although many areas of the mortgage market were affected, interest only mortgages came under major scrutiny and the new rules toughened up repayment vehicle requirements. Your payback plan had to be much more reliable post-2014, and typically could no longer be based on an expected inheritance or the sale of the property itself.
These rules are now relaxing slightly, in tandem with the lifting of age restrictions. With a clear and feasible plan in place, the future sale of a mortgaged property is now an accepted repayment vehicles depending on the lender.
Interest only, equity release & lifetime mortgages
Interest only mortgages are a popular option amongst landlords and can provide an alternative solution to a regular capital and interest repayment loan.
But is an interest only mortgage the right option for you? Or should you stick with a conventional capital and interest buy to let (BTL) mortgage?
Interest only benefits for landlords
Although interest only mortgages are not the best option for every landlord, they do provide many benefits which make them a very popular choice in the sector.
For instance, if you’re investing in BTL properties in order to generate a steady income, interest only mortgages allow you to reduce costs during the mortgage term, increasing your monthly cashflow until it’s time to pay off the capital.
Although landlords must bear in mind that capital must be paid in full at the end of the mortgage term, during the interest only period, landlords will typically pay between around 25%-45% less per month than when using a more traditional repayment loan. This makes landlords feel far wealthier from rental payments on a day to day basis, helping many to enjoy a regular income and even to grow their portfolio of properties.
Tax relief & 2017 rate changes
Tax efficiency is another big factor to bear in mind when choosing a BTL mortgage. Although changes to tax relief for BTL landlords will hit in April 2017, there is still a tax efficiency advantage to be enjoyed as an independent landlord by using interest only loans up until 2020.
The ability to offset mortgage interest payments against tax on rental income has made using large interest only mortgages the most tax efficient option for many landlords for years. Now these relief rates are set to be slashed by 25% annually until they are ruled out altogether in four years’ time.
Interest only mortgages & limited companies
The end of mortgage interest tax relief is being countered by many landlords making the switch to buying property as a limited company. These limited companies can potentially still offset the interest charged, but the costs of setting up such a company and “selling” or transferring property to it can be steep. The potential savings and cost-benefits should be weighed up on an individual basis.
Landlords who do make the switch to limited company status may also find that there are fewer interest only options available to them as many providers offer fewer home mortgage products to companies, considering them a riskier lending prospect, although such products can be found.
These interest only mortgages are frequently confused with lifetime mortgages, which are repaid by the sale of your property after your death and are a slightly different product. Also known as equity release, this product is often used by older people as a way to access some of the equity tied up in their property and when they typically do not have the ability to support the monthly interest charged or simply wish not to have to cover this from their income.
Many older people who took out an interest only mortgage before the MMR tightened up lending use equity releases when they find that they do not have sufficient funds to cover their final capital repayment. Get more information here.
What length of mortgage can I use?
As we get older, the length of the mortgages available to us shrinks. Yet in recent months and years, many providers have raised age limits on products as life expectancy in the UK rises.
At the age of 65, a 15-20 year mortgage term is likely the upper limit. At 70, 10 years or less may be the maximum mortgage term available to you. These limits vary widely depending on the provider.