Categories
Retirement Interest Only Mortgages | Clearly Explained
Obtaining a mortgage later in life can be difficult.
As a lender’s primary concern is whether the borrower is in a position to repay the loan, age does become a key factor in decision-making, and being retired makes convincing lenders to approve mortgages very hard indeed.
This isn’t just a problem with mortgages used to purchase property; it also affects existing homeowners looking to release equity in their property with a remortgage, perhaps for home improvement purposes, debt consolidation, or to give other family members a financial ‘leg up’ to help them get on the property ladder themselves.
Retirement interest-only mortgages, or RIO mortgages, provide a useful solution.
What Are Retirement Interest-Only (RIO) Mortgages?
It’s no surprise if you haven’t heard of a RIO mortgage. A relative newcomer on the mortgage scene, the RIO mortgage has been developed to combine the benefits of an interest-only mortgage with those of lifetime mortgages, offering a product that provides a service for retirees that has previously been lacking.
How a Lifetime Mortgage Works
A lifetime mortgage is one which isn’t expected to be paid in full until either your death, or moving away from the home into long-term care.
It is secured on your house with the understanding that once you no longer need it, the house will be sold and the mortgage (plus all interest) is paid off in full.
With all lifetime mortgage arrangements, the balance of the mortgage becomes due once:
- The homeowners die
- The homeowners move into residential care
- The homeowners move away and sell the property
Where a standard lifetime mortgage accrues interest every month, with that interest in turn building year-on-year until the end of the mortgage term, the interest-only qualities of a RIO mortgage mean you will continue to pay this interest monthly - and the overall balance of the loan is unchanged throughout its lifespan.
This prevents a 'compounding' interest effect from taking place and 'snowballing' in later years.
What an Interest-Only Mortgage Brings
With an interest-only mortgage, you never pay any of the capital of the mortgage, but just pay interest that is added each month.
In this way, the balance of the loan remains static throughout the term.
Each month, a mortgage repayment must be made based on the current interest rate. At 7%, the monthly interest repayment on a £80,000 mortgage would be £466.67.
These monthly payments are very low when compared to a standard residential mortgage, which is why more lenders are willing to lend on interest-only terms to retired people. Simply put, if they believe you can make the monthly payment without difficulty, you are effectively a good investment for them.
Enter the Retirement Interest-Only mortgage
Both acting as a lifetime mortgage and an interest-only mortgage, the RIO mortgage takes the best aspects from both:
- The mortgage has no specified end date. Instead, it works like a lifetime mortgage, being paid when the homeowners move away from the property.
- The mortgage doesn’t accrue interest on the balance and thus risk significantly lowering an inheritance. As the interest is paid off every month, the balance remains static.
- The monthly payments are low and able to be afforded by those on low incomes, such as a pension.
- Affordability checks and debt-to-income checks are more flexible, and mortgage acceptance is higher than a traditional mortgage.
- Once the homeowners reach 80 years old, they can choose to convert the RIO to a standard lifetime mortgage, no longer making further monthly payments, but accruing interest which is added to the overall mortgage balance.
3 Uses of a Retirement Interest-Only Mortgage
Retirement interest-only mortgages can be used for both the purchase of a home, or as a refinancing option to release equity already built up in the home. This makes them extremely flexible, with a wide range of potential applications:
Replacing or Extending a Previous Interest-Only Mortgage
When a standard interest-only mortgage comes to the end of its term, the principal is due.
For many homeowners, this can mean having to sell the property to repay the debt and, while they have potentially made a considerable sum in the investment, it can be a worry to have to move out and have to look once more at a new living arrangement.
This is especially true if you have lived in the house for 20 years or more.
By taking out a RIO mortgage, the homeowner retains their full investment in the property and can continue to live in it indefinitely, continuing to make relatively small interest-only monthly repayments.
Purchasing a New Property in Retirement
If you have a reasonable amount of capital that’s suitable to use as a deposit, or an existing property which can be used as collateral to fund a second home purchase, then a retirement interest-only mortgage is the perfect way to buy a new property, getting around many of the lender’s age concerns that make standard residential mortgages so difficult to obtain.
Releasing Equity in the Property
Having worked and paid your mortgage in your home for all those years, it is only reasonable to want to use some of that investment to enjoy your retirement. A RIO mortgage provides an answer to home equity release that doesn’t put risk on your investment for any heirs.
Use the money released through a retirement interest-only mortgage to have a luxurious once-in-a-lifetime holiday, buy a car you’ve always wanted, or to help a younger family member through college - the choices are yours.
The Pros and Cons of Retirement Interest-Only Mortgages
RIO Mortgage Advantages
- Available to over 55s.
- Low interest-only monthly repayments that are easy to manage.
- No interest building up on the loan, making sure that long-term home equity isn’t dissolved as time goes on.
- A good solution to replace an existing interest-only mortgage that is coming to the end of the term without having to sell.
RIO Mortgage Disadvantages
- No option to repay the capital and clear the loan.
- Interest rates, while competitive, will be higher with a RIO than with a standard interest-only mortgage.
- Your home is at risk. Failure to make repayments on your mortgage may result in your property being repossessed.
- Compared to a lifetime mortgage, you will have a monthly commitment in the form of clearing the interest.
Home Equity Solutions and RIO Mortgages with Clifton Private Finance
At Clifton Private Finance, we work with specialists with the experience and know-how to help you get the best RIO mortgage rates available.
With a comprehensive advisory service, we can discuss your home equity requirements and will help you get advice on the right product for your needs.
To see what we can do for you, call us at 0117 205 4835 or book a free consultation below.
