What is a Retirement Interest Only Mortgage: Benefits, Disadvantages, Eligibility & Vs Equity Release

The older you get, the harder it becomes to adapt your mortgage terms. Retirement interest-only (RIO) mortgages were introduced with this in mind.

They offer older people the opportunity to release money from their home when they cannot remortgage in the traditional sense.

The interest on a RIO mortgage must be paid in full each month, but the loan amount does not have to be repaid.

This means older people can save money in retirement by getting a RIO mortgage and reducing their outgoings.

RIO mortgages tend to last a lifetime as the money is paid back when the homeowners go into residential care or pass away.

Before this point, although there is mortgage debt, the customers are not given a deadline to repay the funds, so they can remain financially stable.

Why Do People Get RIO Mortgages?

A common reason for getting a RIO mortgage is that it makes life more affordable and there is no reason to pay back the loan before you pass away.

Some people are drawn to this as they want to spend their retirement doing things they couldn’t normally afford to do, including buying luxury products, going on expensive holidays, and gifting their loved ones with a cash lump.

Others are in desperate need of increasing their income in retirement, especially as they approach retirement.

Not everyone has a great pension and endless savings, and RIO mortgages can help these people to thrive in spite of their low income.

Many RIO mortgage borrowers intend to buy a retirement property, and perhaps their current property isn’t adequate. This may mean moving into a property that is closer to family, easier to maintain, or equipped for older people.

Benefits of a Retirement Interest Only Mortgage

Firstly, being able to release money and not pay it back is a huge draw of RIO mortgages.

It means customers can live the life they choose in retirement, as all of the funds are theirs to keep. Even though the money is eventually paid back, it won’t affect the amount of money customers get to keep for retirement.

Secondly, RIO mortgages are usually offered to people aged 50 and above. It is notoriously difficult to make changes to your mortgage, or apply for a new mortgage, for this age group.

However, qualifying for a RIO mortgage is much easier, which makes this scheme accessible for older people.

Plenty of people aged 50 and above are struggling financially and yet their homes are valuable.

With a RIO mortgage, these people no longer have to struggle in a beautiful home, or sell their home in order to live within their means. It’s possible to stay in your property and still benefit from a tax-free loan.

Although a RIO mortgage is a loan, as the interest is repaid, the final owed amount would be lower than with certain equity release plans.

This is not only comforting for customers as they know their debt won’t be uncontrollable, but it means they can leave a good inheritance to their relatives.

Finally, RIO mortgages are relatively cheap compared to other similar schemes, such as most equity release products.

This is a huge benefit as it makes the scheme more accessible to people with a low income, and it allows clients to hold onto more of their released funds.

Disadvantages of a Retirement Interest Only Mortgage

If people can afford retirement without borrowing any money, avoiding this scheme is usually the optimum scenario.

When you lend money from a mortgage provider, you must commit to monthly interest payments no matter what. If you aren’t in the position to do this, the scheme could negatively affect your finances.

In extreme cases, this could result in repossession. When clients are not repaying their interest, the lender is entitled to take their property away (though they usually offer to switch the mortgage first).

Another disadvantage is that there is a fairly strict eligibility criteria. As well as being at least 50 years old (and sometimes older), clients undergo income assessments to prove they can afford the monthly payments of interest.

Certain people find this invasive, time-consuming, and stressful. There is also the worry that you won’t qualify for the scheme, as the requirements are not the most lenient out there.

Finally, RIO mortgages do not prevent inheritance, but they can reduce it. The funds that are released from the home would have been funds left in the homeowner’s will.

Eligibility for a Retirement Interest-Only Mortgage

Income is a key aspect of the eligibility assessment for RIO mortgages. There is no minimum income that is accepted, but each client must be able to demonstrate that their earnings and savings are high enough to cover the ongoing interest payments.

Another key factor is age. Most lenders will offer this mortgage to 50-year-olds, but some have higher age requirements.

There are also several companies that do not lend to people above a certain age, such as 80 or 85 years old.

Finally, the property owned by the customer must be valuable enough for the RIO mortgage. This is calculated on a case-by-case basis by looking at the capital in each property.

How Much Can I Borrow With a Retirement Interest Only Mortgage?

There is no standard amount of money each customer can borrow. A minimum amount is always applied, which is usually around £10,000.

However, maximum limits do not tend to be imposed as highly valuable properties will result in higher loans.

The final sum of how much you can borrow is worked out based on factors such as:

• The customer’s age
• The customer’s income
• The property wealth
• The mortgage lender and their terms

As a general rule, you can borrow up to 75% of your property’s value with a RIO mortgage.

Retirement Interest Only Mortgage Vs Equity Release Plans

RIO mortgages are very often confused with equity release lifetime mortgages. Both are non-standard mortgages that are associated with retirement.

The main similarities are:

• Unlocking the value of your property
• Being accessible to older people
• Repaying the loan by selling the property
• Being popular with people in retirement
• Reducing inheritance
• Repaying interest (not obligatory for equity release)

That being said, the two schemes have their key differences.

RIO mortgages are more widely available, as mortgage lenders do not need a separate qualification to offer this type of mortgage.

In keeping with this availability, the scheme is open to people from 50 years old, whereas equity release providers offer plans from 55 years old.

The interest rules are also different. Every borrower with a RIO mortgage must repay the interest every month.

As a result, income assessments are involved in the mortgage application process. However, equity release customers do not have to prove their income unless they opt to have an interest-only lifetime mortgage.

Finally, equity release products can only be pursued by customers whose mortgage has been paid in full (unless they prove they can repay the mortgage before starting the scheme).

On the other hand, to get a RIO mortgage, it isn’t necessary to be mortgage-free as you can use the scheme to pay off an existing mortgage.

What is the Cost of a Retirement Interest Only Mortgage?

Mortgage lenders determine the cost of RIO mortgages, so it depends on their terms as well as their customer’s personal circumstances. The majority of mortgages can be arranged for less than £1000.

There are extra costs to be considered such as completion fees and property valuation fees. In total, most customers spend between £1000 and £3000 on their RIO mortgage.

How Do I Prove My Income for a RIO Mortgage?

The most obvious way that lenders check your income is by looking at your earnings. This is especially helpful if you are still working. Another common form of evidence is bank statements, as they give the lender a good idea of your regular income compared to outgoings.

Other forms of evidence that form part of affordability checks include:

• Investments
• Annuity statement
• Company pension forecast
• State pension forecast

Is There Compound Interest on a Retirement Interest Only Mortgage?

No, there is no compound interest on RIO mortgages, unlike equity release mortgages. As the customer pays off the interest every month, there is no opportunity for it to accumulate.

Many customers appreciate this side of RIO mortgages as it means they get into less debt, and they can potentially leave more money to their family when they die.

What Happens to My Retirement Interest-Only Mortgage If I Go Into Care?

If you go into permanent care, this is handled in the same way as when a client passes away. The lender gets ready to sell your property and take back the equivalent of the funds they lent.

Customers who go into care and still have a spouse at home will not have to deal with their property being sold. This only happens when both clients are either deceased or have entered permanent care.

Can I Get a Retirement Interest Only Mortgage If I’m Still Paying Off My Current Mortgage?

Yes, you can pursue a RIO mortgage even if you have an outstanding mortgage. To do this, you would use the RIO funds to repay the traditional mortgage. You may incur early repayment charges, depending on the lender’s terms.

Do RIO Mortgages Affect State Benefits?

RIO mortgages will only affect means-tested benefits, including Pension Credit. If you release enough money to cross over the minimum savings threshold, these benefits will either be reduced or removed accordingly.

Any other state benefits will remain the same as your income will not be taken into account.

Can I Move House With a RIO Mortgage?

You can move house after getting a RIO mortgage, but it usually isn’t the best decision to make in terms of financial security.

If you need to move house, you can take your mortgage to an alternative property if your lender allows this. Early repayment charges are commonly applied in this situation, and new customers are often affected the most (when the fee is calculated based on the length of the mortgage term).

Another option is to sell the property and move into a lower-value home. This essentially involves speeding up the process, as you are doing exactly what the lender is supposed to do when you enter long-term care or pass away.

You sell the home and give the appropriate amount of funds back to the lender.

Some customers remortgage their RIO mortgage in order to make it more affordable. This could work if you need to pay less interest or access a bigger loan.

However, you would have to go through the application process again, which could be stressful and expensive.

Are RIO Mortgages Safe?

Yes, RIO mortgages are very safe if you select a regulated mortgage lender. Make sure the lender you choose is regulated by the Financial Conduct Authority (FCA).

The FCA sets out rules for each of its members in the FCA handbook (1). There are also additional rules for RIO mortgage lenders (2).

These are:

• The suitability assessment must involve a discussion of tax and benefit implications, or references to relevant resources
• The customer must be informed that a lifetime mortgage may be more suitable
• The lender must state any restrictions on other people living in the property
• The customer should be encouraged to seek advice before taking out the mortgage

Unlike most lifetime mortgages, RIO mortgages do not cover you even if you cannot afford to repay the loan.

Although the loan is secured against your home, there is still a risk of losing your property if you don’t pay the interest each month. In this sense, RIO mortgages can be unsafe if you don’t abide by the rules.

Getting a Retirement Interest-Only Mortgage

As you can see, there are plenty of benefits to getting a RIO mortgage. This scheme allows you to access tax-free funds without dealing with compound interest, moving house, and giving up your inheritance.

However, without expert advice, you risk getting involved with an unsafe RIO mortgage.

To approach this scheme as safely as possible, don’t hesitate to contact us on 0330 058 1579. We’re here from 8am to 8pm to help you make an informed decision about your retirement income.

References

[1] FCA Handbook https://www.handbook.fca.org.uk/

[2] Retirement interest only mortgages https://www.fca.org.uk/publication/impact-assessments/retirement-interest-only-mortgages.pdf