Remortgaging can be difficult for people over 50. A retirement interest-only loan may be an option. Remortgaging may become more complicated as you get older, particularly if it is close to retirement.
A retirement interest only mortgage can also help you unlock some of the home’s equity.
What is a Retirement Interest-only Mortgage?
RIO mortgages or retirement interest-only loans have two main functions. These mortgages can be used by seniors who might not meet the criteria for traditional types of mortgages. You take out a loan against your property. The principal is the same for an interest only mortgage. However, you pay the interest each month and not the capital.
RIO mortgages can be repaid only after your property has been sold. This could occur when you die or when your property is transferred to long-term care. If the mortgage is a joint one, the terms will apply to both borrowers. Your partner can move into care or you can die.
RIO mortgages are easier to get than standard interest-only mortgages due to the way they are repaid. It is easy to show that you can afford your monthly payments. These are the interest only.
What does RIO mortgages look like?
Helen and Roberto own a property worth PS200,000. A RIO mortgage is taken by Roberto and Helen for 25% of their home’s total value (PS50,000) at 5% Interest. The house continues to rise in value. It is now worth PS300,000. They then move into long term care and the property is sold.
The couple paid PS37,500 in interest over the 15 years of their RIO loan. They made monthly payments of PS208.33 each month. Because they did not make capital repayments, the couple still owe the original PS50,000. This amount is paid out of the proceeds of the sale. They still have PS250,000.
What is the difference between an RIO mortgage and lifetime mortgage?
RIO mortgages appear to be similar to a life mortgage in that RIO loans are often used for equity release. However, there are important differences.
A lifetime mortgage cannot be obtained if you do not own 100% of the equity in your home. RIO mortgages are able to be used to pay off existing mortgages and also to release equity.
RIO mortgages are paid off as you go. You can opt for a lifetime mortgage to have this option, or you can decline it (in which instance the interest compounds).
RIO mortgages can be obtained starting at 50 years of age.
The application process is slightly harder than for an interest roll-up life mortgage because you have to prove that you can afford the interest.
While lifetime mortgages cannot be offered by brokers without equity release qualifications (RIO mortgages) are generally more available.
How is a RIO mortgage paid off?
RIO mortgages do not have a fixed term like other mortgages. Although you pay interest every month, the total loan amount is due only after the property is sold.
It is worth noting that many lenders will allow capital repayments to be made as you go. This can be useful if your financial situation changes, and you wish to reduce your loan size and lower your interest payment.
What are the pros and cons of a RIO loan?
Eligibility. To qualify for retirement interest only mortgages, you will need to show that you can afford the monthly payments.
Affordability. Lower monthly payments can mean less income drain. Because the loan term doesn’t expire, you don’t have any obligation to pay it back.
Value. RIO mortgages can be compared to equity release plans like lifetime mortgages. Instead, they ‘roll-up’ the interest. However, this can cause your debt to quickly grow. The interest on a retirement interest only mortgage is not accumulable, so it can be much cheaper over the long-term.
Unlocking value in your home. A retirement interest-only loan can help you save extra money, give you the opportunity to buy a retirement house, or even gift money to your family.
You should plan your inheritance. It’s more likely that you will have an inheritance after your death, as you’ll be repaying the interest.
What are the downsides to a RIO loan?
Eligibility. Lenders must verify your ability to make the monthly payments. It will be harder if you earn a very low income or own a small portion of the property. In these situations, the lender might approve you only for a smaller loan than what you actually need. A lifetime mortgage or home-reversion might be a better option in such cases.
You may lose some of the value of your home. Your family might be limited in the amount they can leave, as the loan repayments will be made from the sale and purchase of your home.
Repossession. Your home could be taken over if the loan is not paid on time. This situation allows you to choose to convert to an interest rolling-up (lifetime) loan. There are no monthly repayments and a higher amount at the end.
Who can get a retired interest-only mortgage
The terms of the lender will affect whether or not your application for a RIO Mortgage is approved. The property must be your main residence. Additionally, the lender may insist that you have a minimum amount equity. RIO mortgages don’t require minimum equity.
To qualify for a RIO loan, you must usually be 50 or older. As you get older (e.g. 70+), your options are limited and it might be harder to prove that you can pay the loan off. For every age there will be income requirements that relate to the amount of money you want to borrow.
How can I get the best mortgage that is interest-only for retirement?
If you are looking into a high-value financial product, such as a loan or mortgage, it is advisable to seek professional advice. A financial adviser or independent mortgage broker can walk you through all the options, so you can make an informed decision and choose the right product.
What are the maximum amounts I can borrow on a RIO loan?
The amount of money you can borrow will depend on your lender’s affordability analysis and the total value or your home. This is more than your income. Your personal and living expenses will also be considered, along with factors that can affect your income and your ability make repayments.
The loan-to value (LTV), ratio of your RIO mortgage will be taken into consideration by your lender. LTV ratios above 80% are considered higher risk by lenders, and will result in a higher rate of interest.
To minimize risk, lenders will lend less to interest-only mortgages that they would for standard capital repayment loans. You might borrow 70% of the home’s value with repayment mortgages, but only 60% for an interest-only.
FAQs concerning RIO mortgages
What happens if my spouse dies? What happens to the mortgage
When all people on the mortgage die, the property is sold and proceeds used to repay the outstanding loan. This is usually done after all mortgage holders have moved into long-term housing.
What happens if my house is being sold?
If you are ready to sell or downsize your property, any outstanding loans can be paid with the proceeds of the sale. You can also remortgage an RIO mortgage. This could require another affordability evaluation if you need a larger loan amount or to switch providers. You may be able transfer your mortgage to a new property by porting. There may be late repayment charges.
What are the costs for a retirement interest-only loan?
While fees can vary among mortgage providers and products, it’s a good idea to budget between PS1,000 and PS3,000. An arrangement fee, survey, valuation, and completion fee might be required. As well as professional advice from a mortgage broker, you will need a solicitor to represent your interests. It’s almost certain that there are lenders who offer both cashback and fee-free loans. So make sure to check out the complete range of products.
What if the interest is too expensive?
If you are unable to make the interest payments on your mortgage, it could lead to your house being sold or that your property is subject to an interest roll-up life mortgage. Any problems should be discussed with a professional adviser immediately.
