Case study - Interest-only mortgage for retirees purchasing a holiday home
Jordan Lynch acted for a retired couple who wanted to borrow £250k on interest-only terms for the purchase of a villa in France. They had no liquid funds but did have a main residence with no mortgage worth approximately £1.5m. They wanted to explore using £250k of this equity to purchase the villa outright. Both applicants were retired, receiving a combined private and state pension of £50k. There was also a separate pension fund not being utilised, with a value of £700k. The couple wanted their monthly payment to be as low as possible given they would be using the holiday home quite regularly during retirement which comes with further costs. They also planned to downsize in future years so were not too concerned with repaying the debt.
There are numerous restrictions associated with interest-only borrowing during retirement. Lenders do not ordinarily allow interest-only on standard mortgage terms and very rarely allow downsizing as a repayment vehicle once an applicant has entered retirement. Furthermore, when assessing affordability, most lenders will only look at actual income received, ignoring the fact that they could increase their income from the unused pension fund. Most mainstream lenders do not allow capital raising for overseas purposes.
We have good relationships with a number of building societies who apply a manual approach to underwriting. We identified one in particular that were happy to provide the full borrowing on interest-only, on what was a market-leading variable rate, the lender agreeing to consider the undrawn pension fund to overcome affordability concerns. The underwriters also decided to allow the capital raise purpose having seen the legal documents for the onward purchase.
“This was a common sense decision by the underwriters, given the potential income available and low loan-to-value on their security. We were delighted to help our client realise their retirement property dream.”
Paul Jordan, Director
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