Although it is true that it can be harder to get a mortgage the older you are, mortgage providers are very aware that this is a growing market and there is a whole range of ‘retirement mortgage’ products available for you to choose from.
This could be the perfect option if you are over 50 and finding it tricky to get approved for a standard mortgage. It can also be an excellent opportunity to free up some equity and give you more funds to enjoy your retirement with.
In this article, our expert team of mortgage advisers at PIL Southampton provide answers to the most frequently asked questions.
Designed specifically for the older individual, particularly if they are nearing retirement, RIO mortgages can be an attractive option as the interest-only element means that your monthly repayments are lower.
Also, at this stage of your life, you may have built up equity if you have owned your property for a number of years and a RIO mortgage gives you a way to free up a portion of that equity.
Just like a standard interest-only mortgage, you only have to pay back the interest on the mortgage during the term of the mortgage, without paying anything towards the capital of the loan.
A typical example of how a RIO mortgage works:
Laura and Fred own a property valued at £400,000. They take out a RIO mortgage of 20% of their home’s value, £80,000, at a 5% interest rate.
Over the next 15 years, Fred and Laura pay monthly interest payments of £333.33 and the value of the property increases to £600,000. Fred dies, Laura moves into long-term care and the property is sold.
The mortgage lender is repaid the £80,000 they lent to Laura and Fred, and Laura is paid the remaining £520,000 minus fees.
You are likely to have to pay roughly £1,000-£3,000 in fees to arrange a RIO mortgage, including survey and valuation fees, solicitor’s fees, a completion fee and a mortgage arrangement fee.
Unlike a standard mortgage, a RIO mortgage doesn’t have a fixed term. The mortgage only has to be repaid when the property is sold, which is usually when the borrower dies or when they move into long-term care.
Note: if the mortgage is on a joint basis, the terms apply to both parties. This means that the surviving mortgage holder can continue with the mortgage after the death of the first. The same applies if the first needs to go into care.
Some RIO mortgages allow you to pay off part of the capital amount in addition to paying your monthly interest payments.
It depends on your circumstances. In the next paragraphs, we examine the advantages and disadvantages of a RIO mortgage, which might help you to decide if this product is right for you.
Talking things through with an experienced mortgage adviser, like our team at Southampton PIL, could also be very useful.
It is easier to get approved for a RIO mortgage than it is for a standard mortgage, this is owing to the way they are repaid.
Also, because they are interest only, the affordability checks are more achievable than if you had to prove you could pay back the capital of the loan as well as the interest accrued on that loan.
The fact that some RIO mortgages allow you to pay off the capital as well as the interest means that you have the opportunity to reduce the size of your loan and therefore lower your interest payments.
Taking out a RIO mortgage on your existing home and getting access to some of the equity in your home gives you more financial freedom in your retirement. With these funds, you might choose to buy a retirement home, enjoy a more comfortable lifestyle, or help family and friends.
Unlike with a lifetime mortgage (Equity Release), you will need to prove that you are able to afford the monthly interest payments. This could be an issue if your regular income level is low and you don’t own a significant portion of your property.
If this is the case, a lifetime mortgage or home reversion scheme – where you sell a portion (or all) of your home to the lender, receiving a discounted value in exchange for the guarantee of staying in the property for your lifetime, might be a better option.
Because the loan you are taking out against your property will need to be paid back to the lender when your property is sold, the value of your estate that is passed on will be lower than it would otherwise have been.
There is also the risk that, should you be unable to keep up with the monthly interest payments, your home could be repossessed. However, it is likely that, if this happens, your mortgage provider would possibly let you transfer your RIO mortgage to a lifetime (interest roll-up) mortgage.
Note: The downside of there being no monthly repayments payable with this type of mortgage means that compound interest can dramatically increase the amount of the loan that would have to be repaid when the property is sold which, in turn, would substantially reduce the value of your estate.
There are several key differences.
The main difference is that you can only take out a lifetime mortgage if you own 100% of your home’s equity, whereas a RIO mortgage can be used to pay off an existing mortgage as well as to release equity.
With a RIO mortgage, you have to pay the interest payments every month unlike a lifetime mortgage, which gives you the option of not paying the interest and instead compounding the interest, known as ‘interest roll-up’ which gets paid to the lender after the property is sold, along with the capital sum.
Because you need to prove you have the funds to pay your monthly interest payments, the application process for a RIO mortgage is stricter than that for a lifetime mortgage with affordability checks being carried out.
Each lender will have their own specific terms, but it is common for applicants to be aged at least 50. The older you are, the fewer choices of lender and mortgage product you will have.
Whatever your age, you will need to prove that your income is sufficient to pay the monthly payments on the sum borrowed.
The property has to be your primary residence, and you may need to own a minimum proportion of equity.
The amount you can borrow will depend on the total value of your home, your lender’s affordability assessment of your income and expenditure, and the loan-to-value (LTV) ratio of your RIO mortgage.
As a general rule, the higher the LTV = the higher the risk to the lender = the higher the interest rate they will offer you.
Another way the lender minimises their potential risk is by lending you less money with a RIO mortgage, than they would with a standard repayment mortgage, based on the same affordability and income figures.
Nothing, if you had a joint mortgage. But, if you were the sole living applicant on the mortgage, then the property will be sold when you die so that the funds made available by the sale can be used to repay the lender. Any outstanding funds will form part of your estate to be passed on to the beneficiaries in your will.
This is also what is likely to happen if the last living mortgage holder moves into long-term care with no prospect of returning to the property.
If you decide to sell, perhaps to downsize as you get older, your mortgage should be settled by the proceeds of your sale.
You will also have the opportunity to remortgage and take up another RIO mortgage, though this will likely involve you repeating an affordability assessment if you are using a different lender or if you need a bigger loan than you had previously got approved.
Alternatively, you could port your existing RIO mortgage to a new property, be careful and find out where you stand with any early repayment charges before you go ahead.
Just like with any mortgage product, if you can’t keep up your payments it could mean that your property needs to be sold, or your RIO mortgage needs to be transferred to an interest roll-up lifetime mortgage.
If your financial circumstances change and you are worried that you will not be able to continue to make your RIO mortgage interest payments, talk to your lender and to a professional mortgage adviser straight away.
RIO mortgages are offered by the same range of mortgage providers that offer standard mortgages. This includes high street building societies and banks, as well as smaller, more specialist providers.
We have a team of experienced mortgage advisers ready and waiting to advise you on the current range of retirement mortgage deals available across the marketplace.
Some lenders often offer attractive deals. Our team has the knowledge and expertise to efficiently shop around for you, scouring the market for the best opportunities for you.
Most importantly, we understand that everyone’s circumstances are unique. We conscientiously fact find everything we need to know so that we can help you to secure the most appropriate mortgage product to suit your needs.
You may also find it useful to read this article comparing equity release mortgages with RIO mortgages. Click here.
Our expert mortgage advisers are here to guide you through the mortgage process, every step of the way. You can email us, fill out the contact form on our website or call us on 02380 668407. We look forward to hearing from you.