A retirement interest-only mortgage is assessed on pension income and repaid from the estate. Why that puts the client's pensions and estate in the same decision as the loan, and how to run both pieces of advice.
A retirement interest-only mortgage lets an older borrower pay interest each month with no fixed end date. The loan is repaid when the last borrower dies or moves into long-term care, usually from the sale of the home. It is regulated as a mortgage, and the lender assesses affordability on the borrower's income in retirement.
For the client, it can keep the family home, or replace an interest-only loan that has reached maturity, while the monthly payment stays at the interest.
The client must keep paying the interest for life. If their income falls, through the death of a partner, a fall in investment income or a change in their pension, the payment may become hard to meet. The affordability assessment at the start is the main protection against that, and it rests on the client's pensions.
The lender assesses whether the client can afford the interest from their retirement income: state pension, workplace and personal pensions, annuities and investment income. The lender will want evidence of each and may test how sustainable drawdown income is.
That makes the pension arrangements part of the lending decision. A client drawing an income from a pension fund may be able to support a larger loan by drawing more, which also depletes the fund faster. That trade-off is pension advice.
For a couple, the interest must remain affordable when one partner dies. Lenders assess the income of each partner alone.
What the survivor receives depends on the pensions. A defined benefit pension may pay a reduced survivor's pension. A joint-life annuity continues at the rate chosen. A drawdown fund passes to the nominated beneficiary. The state pension a survivor can inherit is limited. A planner can review whether the couple's pensions support the survivor, and the lending recommendation can then rest on that review.
The loan is repaid from the estate, so it reduces what the family inherits. Because the debt reduces the estate, it can also reduce the inheritance tax due. From 6 April 2027 unused pension funds count towards the estate, which changes the arithmetic for some families.
Whether that outcome is right depends on the client's wishes for their family and on the rest of their estate. That is estate planning, which a planner can advise on alongside the client's solicitor.
Lending rules require you to consider whether the client's need could be met another way. For a retirement interest-only case, the alternatives include downsizing, a lifetime mortgage, using savings or pension money, and help from family.
You can advise on the lending alternatives. Whether pension money or savings would serve the client better than borrowing is pension and investment advice. Where the client has pensions or investments of any size, offer an introduction before you make your recommendation, and record the order in which the advice was given.
Advice on retirement interest-only lending sits within mortgage advice, subject to the rules that apply to it and to any requirements of your network or the lender. Lifetime mortgages need the equity release permission and qualification. Where your firm does not hold one, work with an adviser who does.
Advice on pensions, investments and estate planning is given by Equity & General. Equity & General Financial Services Ltd is authorised and regulated by the Financial Conduct Authority (No. 474163).
Raise it when you gather the client's pension details for the fact-find. A form of words: "The lender will look at your pension income to decide what you can borrow, and at what happens to it if one of you dies. Whether your pensions are set up to support that is a question I do not advise on. A planner at Equity & General can look at it with you before I make my recommendation."
If the client declines, record it and proceed on the lending. The lender's assessment of the survivor's income will still apply.
Retirement interest-only lending is regulated as a mortgage. Check your network's and the lender's requirements for advisers, which may go further.
The survivor continues paying the interest. The lender will have assessed the loan as affordable on each partner's income alone. The survivor's income depends on how the couple's pensions pay out after a death.
No. That comparison is pension advice. You can set out the lending options and offer an introduction to a planner who can advise on the pension side.
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