The rise of retirement interest-only (RIO) mortgages

Monday, 16 September 2019

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Mortgage advice, Boston Spa, Yorkshire IFA

What is a RIO?

Retirement-interest only mortgages (RIOs) are fairly new and are aimed at older borrowers who may struggle to get a standard residential mortgage. They allow you to borrow against your property and only pay back the interest (and not the loan itself) each month. This means that the monthly mortgage payment is far lower than for a normal "repayment" mortgage. The other big difference is that you only repay the loan when you sell your property, move into residential care or die, rather than after a fixed term like 20 years.

Rather than the onerous steps you have to take to prove your income with a standard residential mortgage, you only have to prove that you can afford the interest.

Of course, you can usually still repay some capital as well as interest, if you want to. This will cut down the size of your loan over time, meaning that more of your property can be passed onto your loved ones.

How much can you borrow?

The amount you can borrow will be based upon an affordability assessment, looking at your income and outgoings to make sure you can keep up repayments after you retire (or if you have already retired).There will be other requirements, too, such as a minimum property value, minimum income and minimum loan size. For example, Nationwide will lend a maximum of 50% of the property value.

How is a RIO different to "equity release"

Until recently the usual way to raise capital from your house in retirement was equity release. With equity release you don't have to make any monthly payments - not even the interest due on the mortgage. Instead, the debt is repaid once you die or move into long-term care and the property is sold. The big problem with this is that the level of debt grows rapidly each year, and can mean that there is little equity left in the property to pass on to your heirs (or to use to downsize, or pay for care costs).

Let's look at an example supplied by the consumer group Which:

  • You own a property worth £200,000. You want to borrow 50% of this, meaning a loan of £100,000.
  • In 15 years' time, your property is worth £300,000, and you go into care, so the loan needs to be repaid. The interest rate is 5%.

Equity release

  • Your monthly repayments: £0
  • Total value of the loan after 15 years: £211,370
  • How much is left after repaying the loan: £88,630

Retirement-interest only

  • Your monthly repayments: £417
  • Total value of the loan after 15 years: £100,000
  • How much is left after repaying the loan: £200,000
  • Total amount of interest paid: £75,055

As you can see, with an equity release mortgage, the amount of debt can double every 12-15 years, so that if you live for 30 years the level of debt could quadruple.

Our views on equity release and RIO mortgages

We never recommend equity release mortgages to our clients, because the lack of interest payments means that the mortgage debt can grow at a surprising rate, which isn't suitable for many people. It can be a shock to your children to discover that the house they thought they were inheriting is instead being used to repay a mortgage.

When it comes to Retirement Interest Only mortgages, we believe these are only suitable for a small minority of customers. If possible it is usually better to downsize rather than take out a large debt in retirement.

Chartered Financial Planners. FCA Regulated (FCA no. 603653). Free initial assesment.