A retirement interest-only mortgage might be an option if you are 50 years old or older and have difficulty remortgaging. As you age, remortgaging can be more difficult, especially if your retirement is near.
Retirement interest-only mortgages are another way to unlock some value in your home. However, there are key differences.
What is a retirement-interest-only mortgage?
RIO mortgages are retirement interest-only mortgages. They have two main purposes. They can be used by older borrowers, who may not be able to meet the lending criteria of other types. The principle behind an interest-only mortgage is the same: you borrow against the property’s value and repay only the interest each month.
A RIO mortgage can only be repaid if your property is sold. This could be your death, or when your home is sold to pay off the mortgage. The terms of a joint mortgage are the same for both borrowers. You won’t have to sell your home if your partner moves or dies.
It’s much easier to obtain a RIO mortgage because it is repaid in the same way as a standard interest-only loan. You just need to prove you can afford the monthly payment, which is only the interest on the loan.
What is the process of RIO mortgages?
Helen and Roberto have a property valued at PS200,000. A RIO mortgage is taken out for 25% of the home’s market value (PS50,000) at 5.5% interest. They continue to build on the house’s value, and it is now worth PS300,000. 15 years later, they move into long-term housing and sell the property.
The couple has made monthly interest payments of PS208.33 over the 15-year term of their RIO mortgage and have paid interest totaling PS37,500. They owe the original PS50,000 to their lender even though they did not make capital repayments. This is paid out of the proceeds from the sale. They now have PS250,000.
What is the difference between a RIO and a lifetime mortgage mortgage?
A RIO mortgage looks very similar to a lifetime loan. RIO mortgages can also be used as equity release. There are however some key differences.
You must own 100% equity in your home to qualify for a lifetime mortgage. RIO mortgages, on the other hand, can be used to pay off an existing mortgage and to release equity.
RIO mortgages require you to pay the interest in installments. This option is available with a lifetime mortgage. However, you have the choice not to do so (in which case interest compounds).
RIO mortgages are available starting at 50.
You will need to show that you can afford the interest payments. This is slightly different from an interest-roll-up mortgage.
Brokers with equity release qualifications are required to offer lifetime mortgages, while RIO mortgages can be obtained more widely.
What is the best way to pay off a RIO mortgage?
RIO mortgages are not like standard mortgages. They don’t have a fixed term. While you make interest payments each month, the loan amount is repaid only when the property is sold.
Some lenders allow you to make capital payments as you go. This is useful if you have a changing financial situation and want to lower the loan amount and your interest payments.
What are the benefits of a RIO mortgage
Eligibility. You generally only need to prove that you can afford the monthly interest payments for retirement interest-only mortgages.
Affordability. You will have a lower income because you pay less. You don’t have to worry about repaying the loan back after a set period because the term of the loan is not fixed.
Value. RIO mortgages have similarities to equity release programs like lifetime mortgages. Some of these don’t require monthly repayments. They ‘roll up’ interest, which can lead to a rapid increase in your owings. A retirement interest-only mortgage doesn’t accumulate interest, which can make them much more affordable in the long term.
Unlocking value in your home. A retirement interest-only mortgage is a great way to save money for retirement. It can also help you buy a retirement home or give money to your friends.
Plan for an inheritance. You’re likely to leave something to your loved ones after your death because you’ll be paying down the interest on your loan.
What are the drawbacks of a RIO Mortgage?
Eligibility. The lender must be satisfied that you can afford the monthly interest payments. If you are unable to make the monthly interest payments or have a low income, this will be more difficult. A lender may not approve you for the loan you need. A lifetime mortgage or home reversion may be better options in this case.
You can forfeit some of the home’s worth. The amount you can leave your family with may be decreased as the loan is repaid through the sale of your home.
Repossession. You could lose your home if you fail to pay the monthly payments. In this case, you might be able to move to an interest-roll-up (lifetime mortgage) with no monthly payments but a larger amount to repay at the final.
Who can qualify for a mortgage with no interest in retirement?
The terms of the lender will determine whether you are eligible for a RIO mortgage. Lenders may require that you have a minimum equity in the property. Some RIO mortgages do not require you to have a minimum amount of equity.
To get a RIO mortgage, you must be at least 50 years old. As you age (e.g. As you get older (e.g. 70+), your options will be more limited and it may prove harder to pay the monthly payments. There will be income requirements for every age and the amount you want to borrow.
What is the best way to get the best interest-only retirement mortgage?
Professional guidance is always a good idea when you are considering a high-value financial product like a mortgage. A professional financial advisor or mortgage broker can help you to understand all options and determine if this is the best option for you.
What is the maximum amount I can borrow for a RIO mortgage
The lender’s affordability assessment and the value of your home will determine how much you can borrow. This includes more than your income. This includes your personal and living expenses, as well as factors that may affect your income or impact your ability to repay.
LTV (loan-to-value) is another factor that your lender will consider when approving your RIO mortgage. LTV ratios that are high will mean higher risk to the lender and therefore, a higher interest rate.
Lenders are more willing to lend to interest-only mortgages than they would to standard capital repayment mortgages in order to minimize risk. A repayment mortgage might allow you to borrow 70% of the value of your home, but an interest-only mortgage might only allow you to borrow 60%.
FAQs about RIO mortgages
What happens if I’m not there? What happens to my mortgage?
After all of the individuals on the mortgage have passed away, the property will go up for sale and the proceeds will be used to pay off the outstanding loan. This applies generally once all mortgage holders have moved into long term care.
What do I do if I need to move?
Any outstanding loans will be paid off if you sell your home and move to a smaller one. Remortgaging a RIO mortgage is also possible. However, this may require another affordability assessment in case you need a larger loan or want to switch providers. Porting is a way to transfer your mortgage to another property. You should be aware that there may be early repayment fees.
What are the expenses of a retirement interest only mortgage?
There are fees that vary depending on the product and mortgage provider, but it is reasonable to budget for between PS1,000-PS3,000. There may be an arrangement fee, valuation and survey fees, as well as a completion fee. A solicitor will be required to represent you and an independent mortgage broker. There are likely to be lenders that offer cashback or fee-free deals. Make sure you explore all the options.
What if I cannot afford the interest?
Failure to pay your interest payments on your mortgage may result in your home being sold or you having to take out an interest-rolling lifetime mortgage. Discuss any issues with a professional advisor as soon as you can.
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