A retirement interest only mortgage is an option for those over 50 who are having trouble remortgaging. Remortgaging is more challenging as you age, particularly if you are nearing retirement.
Retirement interest-only loans can be used to unlock some of your home’s value, much like an equity release program. But there are some key differences.
What is a retirement interest only mortgage?
RIO mortgages (retirement interest-only) have two main uses. First, they are available to older borrowers who may have difficulty meeting the lending criteria for other types. The principle of an interest-only loan is the same as the standard one: you borrow against your property, and pay the interest every month.
RIO mortgages are usually repaid only when your property sells. This could happen when you pass away or when you move into long-term care. If you have a joint mortgage, both borrowers will be able to use the terms. This means that there won’t be any need to sell if your partner is incapacitated or dies.
A RIO mortgage is easier to get than an interest-only mortgage due to the way it is repaid. Just prove you can afford the monthly repayments, which are merely the interest accruing on the loan.
How does RIO mortgages work
Helen and Roberto are the owners of a property that has a market price of PS200,000. At 5% interest, they take out a RIO loan for 25% of their home’s worth (PS50,000). The house keeps increasing in value until it is worth PS300,000. At that point, the couple moves into long-term care and the property goes on sale.
They have made monthly interest repayments totalling PS208.33 for 15 years and paid out a total interest payment of PS37,000. The couple owes the original PS50,000 to lender. Capital repayments were not made. However, this amount is paid from the proceeds of sale. They have PS250,000.
What’s the difference in a RIO mortgage versus a lifetime loan?
RIO mortgages look very similar to lifetime mortgages in that they are used often as equity release. But there are key differences.
You can only take out a lifetime mortgage if you have 100% equity in your home. RIO mortgages can, however, be taken out to repay a mortgage that you have already paid off. You may also use them to release equity, if necessary.
RIO mortgages always require that you pay off the interest at your own pace. This is possible with a lifetime loan, but it’s not mandatory. In this case, the interest compounded instead.
RIO mortgages might be available at a younger age (as early as 50).
Because you must prove that you are able to afford the interest payments, the application process for a lifetime interest roll-up mortgage is slightly stricter.
Only brokers who have equity release qualifications can offer lifetime mortgages. RIO mortgages, however, are more common.
How can a RIO mortgage be paid off?
RIO mortgages have no fixed term, unlike standard mortgages. The interest payments are made monthly, but the entire loan amount must be repaid once the property has been sold.
You should know that lenders may allow you capital repayments at any time. This can come in handy if you need to make smaller repayments and lower your interest.
What are the advantages to a RIO Mortgage?
Eligibility. Retirement interest-only mortgages are generally eligible if you can prove you can pay the monthly interest.
Affordability. Affordability. Less income drain means lower monthly payments. The loan term is not fixed so you don’t need worry about it being repaid after a specified period.
Value. RIO mortgages are similar to equity release schemes such as lifetime mortgages. However, some don’t require repayments. Instead, they “roll up” the interest, which means that the amount you owe could quickly increase. Retirement interest-only mortgages don’t accumulate so they are much cheaper long-term.
Unlocking value in your home. You can use a retirement interest only mortgage to provide additional funds for retirement. This will allow you to buy a retirement property or gift money to family and friends.
It is important to plan for an inheritance. Planning an inheritance is easier because you won’t have to pay interest as you go.
What are the cons of a RIO mortgage?
Eligibility. Lenders will need to verify that you are able to pay the monthly interest. You will have to prove that you can afford the monthly interest payments if your income is not consistent and you own only a small amount of the property. In these cases, a lender might not approve you for a loan that is sufficient to cover your needs. This situation might make a lifetime mortgage, or home reversion, a better choice.
Some of your home’s equity may be forfeited. You may not be able to leave as much money to your family because the loan will be repaid by the sale or purchase of your home.
Repossession. Repossession. The loan is secured on your property. You may be able to switch to an interest roll-up mortgage (lifetime), which has no monthly repayments, but requires a greater amount of money to repay.
Who can obtain a retirement-interest-only mortgage?
The terms of your lender will dictate whether or not you qualify for a RIO loan. The property must be your primary residence. Lenders may also insist that you have at least a certain amount of equity. RIO mortgages may not have minimum equity requirements.
To be eligible for a RIO mortgage you will usually need to be over 50. As you age, (e.g. Your options may be limited as you age (e.g., 70+), and you might have difficulty proving that you can afford the monthly payments. You will need to have a minimum income to be eligible to borrow the amount you desire.
How can I get the best possible retirement interest-only mortgage
When considering high-value financial products such as a mortgage, it is always wise to consult a professional. Independent mortgage brokers or financial advisers can guide you through the various options to help you decide if it is the best choice for you and the best product for your needs.
What amount can I borrow from a RIO Mortgage?
Lender’s affordability evaluation and your home’s total value will determine the amount you are allowed to borrow. This goes beyond your income. These factors will include your personal and daily living expenses as well as factors that could impact your income and affect your ability to pay your repayments.
Your LTV ratio will be considered by your lender. LTV ratios higher than 80% will lead to lenders taking greater risk, which will cause you to pay a higher interest.
In order to reduce risk, interest-only mortgage lenders will generally lend less than standard capital repayment mortgages. With a repayment mortgage you may be able borrow 70% of your home’s worth, but you might only get 60% with an interest-only loan.
FAQs regarding RIO mortgages
What happens to my mortgage if I pass away? What happens to my mortgage
The property will be sold once all those on the mortgage are gone. Any remaining loan balance will be paid. This usually happens once all mortgage holders have moved into longterm care.
What happens if I move out of my home?
If you decide to sell the property and downsize, any remaining loan can be settled with proceeds from the sale. A RIO mortgage can be refinanced, but you will need to undergo an affordability assessment. If you require a larger loan, or wish to switch providers, this might also be possible. You may also be eligible to transfer the mortgage to a different property through a process called porting. Early repayment fees might apply.
What are the cost of a retirement-interest-only mortgage?
Although fees vary from product to mortgage provider, you should expect to spend between PS1,000 – PS3,000. A completion fee may be required, along with survey and valuation fees. To act for you, a solicitor is required as well as independent mortgage broker advice. You will almost certainly find lenders that offer fee-free or cashback deals. Be sure to look at the entire range of products.
What happens if I don’t have the funds?
In the event that you fail to make your mortgage interest repayments, your house could be foreclosed or you may have to get a lifetime interest roll-up mortgage. Talk to a professional as soon as possible if you have any questions.