The Society is among the first lenders to offer a Retirement Interest-Only mortgage since the Financial Conduct Authority (FCA) reviewed later life lending and introduced proposals to improve access to mortgage borrowing for older people, including those with maturing interest-only mortgages without sufficient funds to repay them.
Scottish Building Society already has over a decade of specialist experience in the market with its interest-only Lifetime Mortgage which allowed borrowers to unlock cash tied up in homes and pay only the interest on the loan. As with the new RIO mortgage, when the property is eventually sold the loan is repaid and the remaining equity stays within the family.
Paul Alexander, Head of Business Development at Scottish Building Society said:
We are expecting high demand for this product, especially when older people become aware of the benefits. It’s good news for those who have perhaps reached the end of their standard interest-only mortgage but have a shortfall in savings to repay the loan, and provides an alternative to a house sale or expensive loan repayments. It also provides an attractive option for managing inter-generational wealth where older people could help younger members of the family buy their first home, for example, and is an effective tool for reducing inheritance tax burden.
Because RIO mortgages are not classified as equity release products, financial advisers do not need special permissions to recommend them as an option which means they will be more widely accessible. Advisers and their clients can take comfort from the fact that we are already specialists in interest-only later life lending with many years of experience under our belt.
The Scottish Building Society RIO mortgage is available to homeowners in Scotland aged 60 and over who have a reliable monthly income in retirement. The Society offers up to 50% of the value of the property as a cash lump sum and charges interest only on the loan. Unlike standard interest-only mortgages there is no set end date for settlement of the loan and capital is only repaid after death or on the sale of the house. There is no maximum age limit.
Mr Alexander added:
Financial planning in retirement is becoming more flexible with new pension freedoms, but often the biggest asset in retirement pots can be in homes. We treat everybody as an individual and are pleased to have improved access to borrowing for the over 60’s. Where the applicants have a secure income and meet our affordability criteria, a Retirement Interest-Only mortgage may be a more suitable option than equity release.
John Morgan (68) and his wife Linda Anne were facing a dilemma when it became apparent three years ago that they would be unable to repay the mortgage on their Dumfries home because of a shortfall in their endowment policies. They had only eight years to plug the gap, or be left in the red with their current mortgage provider which would mean that they would be faced with the daunting prospect of selling up and downsizing.
This is a problem facing many pensioners and it is only going to get worse for future generations,” said Mr Morgan, a retired accountant who also had a long career in local government.
After discussing their options with the family they turned to Scottish Building Society for help. They agreed to borrow 35% of the value of their townhouse with an interest-only mortgage. It meant they could eradicate the debt with their previous lender and pay interest only on the loan, the equivalent of an affordable rent, for the rest of their lives.
It was an excellent solution for us and gives us both stability and flexibility. We have since moved to the central belt to be closer to our daughters and grandchildren and have transferred the mortgage to our new home. When we die the original loan will be repaid out of the proceeds of the sale of our property, with the remainder passed on to our children.