Updated 03 December 2020
If you’re aged 50 or over and are having difficulty remortgaging, a retirement interest-only mortgage may be an option. Remortgaging can become increasingly difficult as you get older, especially if you’re at or near retirement.
Retirement interest-only mortgages can also be a way to unlock some of the value of your home, in a similar way to an equity release scheme (but with some key differences).
Retirement interest-only mortgages, also called RIO mortgages, have two main uses. Firstly, they can be used by older borrowers who might struggle to meet the lending criteria for other types of mortgage. The general principle is the same as a standard interest-only mortgage – you take out a loan against the value of your property and only repay the interest each month, not the capital of the loan itself.
The main difference is that a RIO mortgage is usually only repaid when your property is sold. This might be when you die, or when you move out of your home into long-term care. If it’s a joint mortgage, the terms apply to both borrowers, so you won’t need to sell if your partner dies or moves into care.
Because of the way a RIO mortgage is repaid, it’s easier to get one of these than a standard interest-only mortgage. All you need to do is prove that you can afford the monthly payments, which are only the interest that accrues on the loan.
Helen and Roberto own a property with a market value of £200,000. They take out a RIO mortgage for 25% of their home’s value (£50,000) at 5% interest. The house continues to increase in value and 15 years later is worth £300,000, at which point they both move into long-term care and the property is sold.
Over the 15 years of their RIO mortgage, the couple have made monthly interest repayments of £208.33 and paid a total of £37,500 in interest. As they didn’t make any capital repayments, they still owe the original £50,000 to the lender, and this is paid from the proceeds of the sale. They are left with £250,000.
On the face of it, a RIO mortgage is similar to a lifetime mortgage, in that RIO mortgages are often used as a form of equity release. However, there are some key differences.
Unlike standard mortgages, RIO mortgages don’t have a fixed term. You make interest payments every month, but the full loan amount is only repaid when the property is sold.
It’s worth noting that some lenders will allow you to make capital repayments as you go. This can be handy if your financial situation changes and you want to reduce the size of your loan, and by doing so lower your interest payments.
Whether you’ll qualify for a RIO mortgage will depend on the lender’s terms. The property must be your main residence, and the lender may insist on you owning a minimum amount of the equity. However, some RIO mortgages have no minimum equity requirement.
Usually you’ll have to be aged 50 or over to get a RIO mortgage. However, as you get older (e.g. 70+) your choices will narrow and you may find it harder to prove you can keep up the payments. At every age, there will be minimum income requirements linked to how much you wish to borrow.
It always pays to seek professional guidance when considering any high-value financial product such as a mortgage. An independent mortgage broker or financial adviser can talk you through all the options so you can decide whether this is the best solution for you, and find the right product for you if so.
How much you’re allowed to borrow will depend on the lender’s affordability assessment, and on the total value of your home. This covers more than just your income. Personal and living expenses will be taken into account, along with factors that could affect your income and impact your ability to make repayments.
Your lender will also consider the loan-to-value (LTV) ratio of your RIO mortgage. High LTV ratios mean more risk for the lender, so will result in you paying a higher interest rate.
With any form of interest-only mortgage, lenders are generally willing to lend less than they would if it were a standard capital repayment mortgage, in order to minimise risk. For example, while you might be able to borrow 70% of your home’s value with a repayment mortgage, you might get only 60% with an interest-only mortgage.
Once all the people named on the mortgage have died, the property will be sold and the funds will be used to settle the outstanding loan. This generally also applies once all the mortgage holders have moved into long-term care.
If you decide you’re ready to sell and downsize to a smaller property, any outstanding loan will be settled using proceeds from the sale. You can also remortgage a RIO mortgage, but this could involve another affordability assessment if you need a bigger loan or switch providers. You might also be able to transfer the mortgage to a new property – a process known as porting. Be aware that early repayment charges might apply.
Fees vary between products and mortgage providers, but you should budget to spend between £1,000 and £3,000. You may have to pay an arrangement fee, survey and valuation fees, and a completion fee. You’ll need a solicitor to act on your behalf as well as advice from an independent mortgage broker. You’ll almost certainly find some lenders offering fee-free and cashback deals, so be sure to explore the full range of products available.
Failing to make interest repayments on your mortgage could mean your house will have to be sold, or that you have to move onto an interest roll-up lifetime mortgage. Always discuss any problems with a professional adviser as soon as possible.
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