What Older Borrowers Should Know About RIO Mortgages
A retirement interest-only mortgage (RIO) is a type of home loan available to borrowers over 55. With a RIO, you repay interest monthly. Capital does not have to be repaid until you die or go into long-term care.
Older borrowers can struggle to get mortgages due to age limits imposed by lenders – typically they will want to ensure that the loan will be repaid anywhere between age 75 and 95. They may not set up a new loan for you if you are over 70.
Whether you are buying a new home for retirement, struggling to renew an existing mortgage or simply want to access some of the equity that has built up in your home, a retirement interest-only mortgage could be a solution.
What is a retirement interest-only mortgage?
A retirement interest-only (RIO) mortgage is much like a standard interest-only mortgage. You borrow a set amount of money against your home then each month you make repayments towards the interest on the loan.
The big difference is when it comes to repaying the capital. With an RIO mortgage, you do not need to pay back the capital until you sell your home – usually when you need long-term care or pass away. When you no longer need your home, it can be sold and the lender is repaid from the sale.
RIO mortgages vs equity release
As RIO mortgages enable you to unlock some of the equity in your property, it is easy to confuse them with equity release but there is an important difference between the two.
With an equity release mortgage, you borrow money against your home and don’t have to make any repayments until you sell the property and pay off the debt. This means the interest charged on the loan is added to the amount you borrowed and as such, the longer you live, the more expensive the debt becomes.
In contrast, with a RIO mortgage you are repaying the mortgage interest every month so the capital that will need to be repaid when you sell your home will not grow over time. As the interest on the debt hasn’t compounded the overall cost will be much lower.
Who is eligible for a retirement interest-only mortgage?
There are several things lenders will consider when assessing an application for a retirement interest-only mortgage. These include:
- Your age – RIO mortgage applicants must be at least 55.
- Your income – you must be able to afford the interest repayments, so you need to prove you have a reliable income. This is easier than with a capital repayment mortgage as the repayments will be lower.
- The value of your home – Lenders need to be sure they will get their money back so they will want to value your home. They will only lend you up to a certain percentage of that value, for example, 50% or 60%. That way they can be sure that even if house prices fall, they will still be able to recoup their money when your home is eventually sold.
The pros and cons of retirement interest-only mortgages
- There is no upper age limit, unlike traditional mortgages.
- Affordability checks should be easier because monthly repayments are substantially lower than capital repayment mortgages.
- You won’t have to provide evidence of how you’ll repay the capital as you would with a regular interest-only mortgage, as the loan will be repaid when the property is sold.
- RIO mortgages tend to be cheaper than equity release as your interest is repaid monthly and doesn’t roll up.
- You don’t have to downsize to access the money in your home.
- The mortgage doesn’t have a fixed term, so you don’t have to worry about repaying the capital. It will only be due when you no longer need your home.
- You will have to prove you have a steady, regular income that will cover interest repayments.
- Your home will have to be sold eventually to repay the debt.
- If you fall behind with repayments your home could be repossessed.
How to compare retirement interest-only mortgages
Retirement interest-only mortgages are still a relatively niche product, typically offered by building societies rather than banks. As a result, it is difficult to find best buy tables to easily compare mortgages. You will need to visit the websites of different providers or telephone around to find out the rates on offer and compare the different deals.
Make sure you compare the fees and charges that come with each mortgage as well as the interest rate. Fees can significantly add to your overall mortgage costs.
You can remortgage with a retirement interest-only mortgage so make a note of the length of your initial deal and shop around for a new mortgage when it comes to an end.
If you’d like some help finding the right retirement interest-only home loan for your needs a mortgage broker can help.
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Ruth is a freelance journalist with 15 years of experience writing for national newspapers, magazines and websites. Specialising in savings, investments, pensions and property. Read more