Interest-only mortgages have the attraction of relatively lower monthly repayment costs – you are only repaying the interest in those instalments and delay repayment of the capital amount until the end of the mortgage term.
Apart from that broad appeal, however, interest-only mortgages may have a particular appeal to the older homeowner – and these are called retirement interest-only mortgages, or RIO mortgages.
When they first appeared on the market, take-up of these retirement mortgages was relatively muted, argued an article in the FT Adviser on the 25th of June 2020. At that time, around 12 different lenders were offering 38 RIO mortgages of one type or another. That number has now grown to 20 lenders with 87 products on offer.
What are retirement interest-only mortgages (RIOs)?
Retirement interest-only mortgages are only available for those over the age of 55. They are likely to be a particular interest to older borrowers who are in or nearing retirement and:
- face difficulty in raising the funds necessary to repay the capital on an existing interest-only mortgage that is nearing its terminal date; or
- who want to unlock some of the equity tied up in their property value for home improvements or a better lifestyle and view an RIO mortgage as an alternative to downsizing or arranging equity release.
These are the principal reasons, according to an article published in Which? magazine in April 2020, why customers look to such retirement mortgages.
How does a retirement interest-only mortgage work?
The description is relatively self-explanatory. A retirement interest-only mortgage is suitable for some who has reached or is nearing the age of retirement – you must be at least 55 years of age to qualify. It is also an interest-only mortgage.
As with regular interest-only mortgages, the reference to interest only may be something of a misnomer. For sure, the monthly mortgage repayments you need to make cover the interest only on the loan – making those instalments somewhat cheaper than for a standard repayment mortgage of both interest and capital. But, of course, the capital also needs to be repaid on an interest-only mortgage – and this is done in a single lump-sum payment when the mortgage reaches its full term.
Typically, though, and unlike most other interest-only mortgages, you do not have to have evidence for how the capital will be repaid. An RIO mortgage is instead a type of lifetime mortgage based on the assumption that you will pay off the capital balance by selling the property – either when you move into long-term residential care or when you die, explains the Money Advice Service.
Although this might make it seem rather like equity release mortgages, they are different. There are no monthly repayments on the lifetime mortgage associated with equity release, whereas RIO mortgages require monthly repayments of the interest on your loan.
As with any other mortgage, the lender will assess the affordability of your mortgage by ensuring you have a secure income and by determining your overall financial status – and the size of any loan is likely to be based on those calculations.
How much can I borrow with a retirement interest-only mortgage?
The amount you can borrow with a retirement interest-only mortgage varies in line with the different policies and terms laid down by the relevant lenders within their mortgage products. You will typically need a regular income – which could be from your pension perhaps, or other savings or investments.
Typically – whether it’s a standard interest-only mortgage or an RIO mortgage – you can borrow less with an interest-only mortgage than a regular repayment mortgage when your monthly repayments comprise elements of both interest and capital.
It is not unusual, for instance, for RIO mortgages to be limited to just 50% loan to value (LTV) – meaning that you are borrowing only half of the value of the home. In contrast, you might have been able to borrow, say, 65% if it was a standard repayment mortgage combining both interest and capital in your monthly repayments.
Who may RIO mortgages be suitable for?
The principal impetus for the widespread marketing of retirement interest-only mortgages in fact came from the regulator, the Financial Conduct Authority (FCA).
It was in March of 2018 that the FCA reclassified RIO mortgages so that they were no longer grouped together with equity release arrangements but allowed to stand on their own as a particular mortgage model.
The FCA was eager to help head off any crisis brought about by homeowners who had entered earlier interest-only arrangements and were now discovering that they would be unlikely to afford to repay the outstanding capital balance. By providing a potential source of finance, the FCA saw RIO mortgages as giving a further option, in addition to such homeowners having to downsize or to enter an equity release arrangement.
How can I find the most appropriate retirement mortgage for me?
RIO mortgages are specialist mortgages, and they are not offered by all mortgage lenders or by your building society.
So that you may identify suitable lenders and have access to competitively priced mortgage deals for older borrowers, therefore you might want to consult a professional mortgage broker.