Retirement Interest Only (RIO) mortgages are a relatively new option for borrowing money in later life. The Financial Conduct Authority lifted the requirement for them to fall under ‘lifetime mortgage’ regulation in 2017. This has allowed lenders to offer products which have similarities to both existing interest only mortgages, but which can run until the borrowers die.
Borrowers will pay the monthly interest on loans, for life, and the debt is only repayable when a specified ‘life event’ occurs. These events are mainly the death of the borrower(s) or they go into permanent long-term care. In that sense, they share some traits with Equity Release Interest Only Lifetime Mortgages, which are also payable on a specified life event. However, there are some very important differences.
RIO and Lifetime Mortgages – what are the differences?
- The minimum age for a RIO mortgage will typically be 55, the same as lifetime mortgages. However, some lenders have higher minimum ages.
- RIO mortgages require monthly payments of interest throughout the term; lifetime mortgages don’t. Some lifetime mortgages do allow interest payments, or ad-hoc partial repayments, but they are not a requirement.
The interest due on a non-RIO lifetime mortgage can be rolled-up onto the debt and is only repaid when the property is sold. However, RIO mortgage interest charges must be paid monthly. Therefore, RIO mortgages require an affordability check to be completed to make sure that payments are affordable throughout the term. This is not the case with lifetime mortgages.
For joint borrowers, an individual income assessment is made on each person. This is to ensure the loan remains affordable if either dies. Therefore, a lender will also look at the amount of any widow or widowers pension that could be payable if the partner dies. The total pension income must be enough to afford the loan in a sole name. Lenders will not consider employment or self employment income, as the borrower could stop working and retire at any time. These checks will need to be carried out even if you switch to a RIO mortgage with your current lender.
It is this affordability factor that has caused many enquiries for a RIO to fail. Other reasons for applications failing are that the maximum loans can be capped at around 50% – 55% of the property value, although some lenders offer slightly more.
Who might Retirement Interest Only (RIO) mortgages appeal to?
A large number of interest only mortgage customers are coming to the end of their term with no means of paying the loan. Despite not having funds available, they often want to stay in their home instead of ‘downsizing’ at retirement. Therefore, as long as there is enough retirement income to afford the interest payments, they can remain in their homes.
RIO mortgages are also available to those who are currently mortgage-free. The money raised can be used for a variety or purposes. including gifts to family. This can sometimes be helpful for children who need a deposit to buy their own home. Funding the purchase of a holiday home could be another use..
It is also possible to use a RIO mortgage to buy a property, it does not have to be on a property you already own. This could bridge the gap between the value of the home you sell, and a higher priced new home.
Other points to note
The interest rate you are offered on a RIO mortgage will not be ‘fixed for life’ as it can be with a lifetime mortgage. You may be offered a fixed rate for a fixed period, but will be at the mercy of the market rates when it ends.
The ‘Safe Home Income Plans guarantees‘ available on lifetime mortgages do not apply to RIO mortgages. This is because payments of interest must be made each month. You will go into arrears if you default on payments meaning your home could be at risk of repossession. So the risk factors for a RIO are broadly the same as for any ‘normal’ residential mortgage. Taking out a mortgage could affect your eligibility to any state means tested benefits. It can also affect your tax position. Specialist advice may need to be sought before proceeding with such a mortgage.
One significant final point is to consider which advisers are able to arrange RIO mortgages. Currently, any qualified mortgage adviser can do so. However, they are not obliged to tell you if an equity release lifetime mortgage could be better for your circumstances. It may therefore be more appropriate to consider using an adviser who holds both the normal mortgage qualification, but also the specialist Equity Release qualifications. This will allow them to consider all options for you and not be restricted to just RIO mortgages. Our adviser Andy Wilson is qualified and experienced in both types of borrowing.
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YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
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