Retirement Interest-Only Mortgages

Retirement Interest-Only is a type of mortgage aimed at borrowers in later life who are happy with a commitment to pay monthly interest in retirement. There could be other ways to meet your needs so you should have a look at our page Comparing Retirement Mortgages.

What is a Retirement Interest-Only Mortgage - RIO?

A retirement interest-only mortgage, let’s use the common abbreviation, which is RIO, is similar to a standard residential mortgage. The loan is secured on your property, the amount you can borrow is assessed based on your guaranteed income, and your home is at risk if you don’t keep up those payments.

The main difference is that there is no fixed end date for when the capital that you borrow must be repaid. Instead, the mortgage comes to an end, either on the death of the borrowers, or when the last borrower moves into full time residential care.

How is RIO different from a Lifetime Mortgage?

First, a warning! When you enquire about a RIO mortgage, it is always worth being able to compare them with a Lifetime mortgage. All properly registered mortgage advisers are qualified to advise on RIO mortgages. This is not true of Lifetime Mortgages, because an adviser needs a higher level of qualification. Make sure your adviser is qualified to do both or you won’t get a fair evaluation between the two types and might miss out on the better option.

To help consider which option is best for you, let’s look at some comparisons:

The first major difference is that payments to a lifetime mortgage are voluntary on your part. If you decide to reduce payments, or take a break, your home is not at risk. On the other hand, if you feel you need help with the discipline of making payments, a RIO is probably the best approach.

The interest rate for lifetime mortgages is fixed for life whereas the interest rate for the majority of RIO mortgages is fixed only for a specific period. When that term expires you can negotiate a new rate but there is no way to predict what the future cost will be.

A RIO mortgage requires an assessment of your income and expenditure, this goes for both applicants individually for joint cases. You will have to prove that, on the death of one applicant, whoever survives would be able to afford the interest payments from their remaining income. Income Is not assessed for lifetime mortgages.

A lifetime mortgage allows you to set aside an amount of money that you can drawdown in future for emergencies or for times when you predict that extra money will be needed. You might be able to borrow more under a RIO mortgage, but this would need a new application and evaluation of your income and outgoings.

You may be able to borrow larger amounts from a RIO mortgage than from a lifetime mortgage. The maximum loan will be around 55% or 60% of the property value provide your income is sufficient. Otherwise the amount is limited based on the way that the lender calculates affordability. The maximum available under a lifetime mortgage is based on your age rather than your income.

Who can have a RIO mortgage?

The age requirements for a RIO mortgage, and the types or property covered, are substantially the same as a lifetime mortgage. The only difference is that you must prove the lowest earner would be able to sustain interest payments from their income in retirement. The minimum amount you can borrow will be around £10,000.

Risks

Money left for your beneficiaries

The money outstanding on a RIO mortgage will need to be repaid from the estate which means that there will be less to share amongst your beneficiaries. Unlike a lifetime mortgage, however, the amount can be predicted at the time you borrow the money because there is no roll-up of unpaid interest. Of course, this is also true of Lifetime Mortgages if you feel you will have the funds and the discipline to make regular payments.

Committed payments

A RIO mortgage requires monthly payments to cover interest as it falls due. This shouldn’t create too much difficulty because the ability to meet those payments will have been assessed at retirement.

However, your disposable income for other expenditure could be affected by general cost of living increases or other factors such as falls in stock market returns. This would mean you had less to spend on groceries, running the car, holidays, and so on. If the monthly payments did become unaffordable, you would have to refinance or sell the property.

Other people who live with you

As well as the death of the mortgage holders, another trigger for the mortgage to be repaid is the need for full time residential care, this is the same as lifetime mortgage. If you have somebody living with you who is not party to the mortgage, they will have to move out at that point. Although the mortgage would normally be repaid by selling the property, it could be left to beneficiaries if they can pay off the debt, maybe from raising a mortgage of their own.

Remarriage

Lenders sometimes allow an arrangement to be renegotiated so that your new partner can be added to the loan. Details will depend on their age and the current borrowing and property value. Be prepared to pay a fee for this assessment.

What can the money be used for?

Money raised from a RIO mortgage can be used for much the same things as a lifetime mortgage. They include:

• Pay off an existing residential mortgage or a more expensive later life mortgage

• Cover the costs of essential repairs or home improvements

• Purchasing a new home to help move across the country or if a family splits up

• Gifts to children or grandchildren to clear student loans or help with a deposit

• Luxuries such as holidays, cars and holidays

• Helping to manage inheritance tax

Fees and costs

You will need a solicitor to do the legal work. The cost will depend on the amount borrowed and the complexity of the circumstances, but standard cost would be around £650. Customarily, this amount can be added to the mortgage.

There may be some fees related directly to the mortgage. The lender will need to commission a valuation to check the value of the property although this is often free.

There is sometimes an arrangement fee - these can be up to £995, but where they exist, the contract will benefit from a lower interest rate.

The adviser will let you know at the beginning if they are charging a fee. Retirement interest-only mortgages are often more complex than other types of borrowing and the fee from the lender may not cover the work required. You will be told how much is required, when it will need to be paid and whether there are any circumstances where a refund is payable.

If the mortgage is repaid early there may be a fee called an Early Repayment Charge.