You might feel like your options are very limited if you are trying to secure a mortgage with a traditional lender during your retirement years. While options might be limited, they are not exhausted. You can tap into the equity in your home and make use of a retirement mortgage.

A retirement mortgage is just that. It is a loan that you secure against your property either after you’ve retired or as you are about to retire. You make repayments against the loan and those payments could be toward interest and/or capital. The terms of your repayments will be governed by your mortgage deed terms. The kind of payments you choose to make, whether interest, capital, or a combination of the two, has a big impact on your overall loan balance and there are different strategies you can employ to control the balance you owe the lender.

The structure of the payments is quite straightforward. The time period over which you make the repayments will be determined by your loan terms. You might make payments for a very specific time period such as 10 years or you could make repayments for the rest of your life. If you pay both the capital and the interest, your balance will actually decrease. If you make payments that cover the full interest charged, your balance will always stay level with what you originally borrowed. If you make payments against the interest but your payment does not cover the full interest incurred, your balance will continue to go up but not at the rate it would if you were not making any payments at all.

With a retirement mortgage, there is an affordability check. This means that you need to prove you can afford the repayments in order for you to be approved for the loan. So, you need to furnish proof of income and you also need to prove what your income will be once you’ve retired, if you haven’t already. What is interesting is that many homeowners assume they have a better chance of being approved for a retirement mortgage if they apply to borrow on a joint basis, but this is not the case. With retirement mortgages, if you are borrowing jointly, you need to ensure that just one of you will be able to sustain the payments after the first homeowner passes, since repayments will continue as outlined in the loan terms. This can make it a bit more difficult to get approved when applying jointly.

For those who are self-employed and still working, you’ll need to provide SA302’s, 3 years of trading accounts and your pension forecast. For those who are employed through an employer, you need to provide any occupational scheme pensions, P60’s, and your state pension forecast. Finally, if you are already retired, you’ll need to document your P60’s from all pension schemes, the last annual Department of Work and Pensions state pension letter you received, and the last 3 months of your bank statements. Those bank statements serve as proof of your income.

If you have any investment income or drawdown funds that you receive, you will also need to document that income as well.

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Advantages of Retirement Mortgages

The biggest advantage of a retirement mortgage is that it allows you the cash you need during retirement, even if you don’t qualify for a standard or traditional mortgage product.

Another advantage is that you get to have at least some control over your loan balance. While some homeowners do not want to be obligated to make repayments, many homeowners are happy to do so since it means that their loan balance will not continue to go up at the rate it would if payments were not being made against the balance.

Disadvantages of Retirement Mortgages

The biggest disadvantage of a retirement mortgage is that you need to make repayments against the loan. For some, this isn’t necessarily a drawback since it helps control the overall loan balance but for others who don’t want to make repayments this can be a negative feature of the plan.

In addition, the affordability check can be a disadvantage as well. You have to prove that you can afford your repayments which means gathering and providing more documents.

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