Many older people are asset-rich but cash-poor. Managing your monthly expenses on a pension can be challenging. However, options such as retirement interest-only mortgages and lifetime mortgages are available to release equity from your property, which means you can afford to live and enjoy your later life without money worries.
Retirement interest-only mortgages can be a good way to make life more comfortable for older borrowers and can be flexible if you don’t want to take a product with a fixed term that must be repaid by a specific date. Read on to learn more about how to get an extra monthly income.
What should you consider when getting a retirement interest-only mortgage?
As with any financial decision, it’s vital to look at the pros and cons of retirement interest-only mortgages carefully because they can have long-term implications for your future and your legacy.
The key differences between a retirement interest-only loan and a standard interest-only mortgage are that the mortgage term is not fixed, and you can get a mortgage product after the age of 50, which can be harder with traditional loans.
A RIO loan is generally paid off when you die or move into long-term care. Let’s explore the benefits and considerations of RIO mortgages for equity release.
Advantages of RIO mortgages
There are some great advantages of retirement interest-only mortgages for borrowers who cannot meet the criteria for other types of mortgage deals. If you can prove that you can afford the monthly interest payments, you can be accepted for a retirement interest-only (RIO) mortgage.
Lower monthly repayments
RIO mortgages have lower repayments than traditional repayment loans because you are only making interest payments, not paying off the capital part of the loan.
The capital is repaid when the house is sold, so this reduces the monthly payments considerably, making it an affordable way to borrow money in retirement. There is no loan term with a RIO mortgage. As you pay interest only, these will be cheaper than a monthly repayment mortgage.
Increased cash flow
A retirement interest-only mortgage will pay you a percentage of your property value. Let’s look at an example.
Anne and Dave’s home is worth £500,000. They take out a RIO mortgage of 25% and receive £125,000 in cash. They may monthly payments of just the interest and when they die or move into long-term care, the capital of £125,000 is paid back from the sale proceeds.
This money can be used to provide an additional monthly income, to remortgage or to pay for home improvements or other large expenses such as university fees or to gift money to family members to get on the property ladder.
Flexibility
Retirement interest-only mortgages offer older homeowners more flexibility when managing monthly expenses or larger one-off purchases.
Potential for equity release
The equity release sector has suffered from bad press in the past. These days, however, there are more safeguards in place for borrowers to ensure that an Equity Release mortgage is suitable for their circumstances.
Many products offer more competitive interest rates now and negative equity guarantees, so you can’t end up owing more than your property is worth. Equity Release may offer a bigger loan size if you are on a low income.
Learn more about equity release here.
Disadvantages of RIO mortgages
Retirement interest-only mortgages may not be suitable for all older homeowners seeking to remortgage or release cash from their property. Here are some of the things to consider before you take a retirement interest-only (Rio) mortgage.
Repayment burden
Although you will not have to repay the capital amount borrowed until you leave your home, you must be clear that an RIO mortgage loan secured against your property will be repaid out of sale proceeds.
This means that you cannot pass on the full value of your property to beneficiaries. Some providers have a minimum loan size, which might be more than you would like to borrow, so be prepared to shop around for the right deal.
Interest rate fluctuations
Retirement interest-only mortgages, like standard interest-only mortgages, may be offered at fixed or variable interest rates. If you take a variable rate, your monthly interest repayments can vary up or down. This can make budgeting for your finances more challenging.
Affordability in retirement
As with any mortgage application process, you’ll need to pass the lender’s affordability assessment, which will vary among mortgage providers.
If you are on a lower income or your joint income would reduce upon one applicant’s death, you will be restricted on how much you can borrow on a retirement interest-only mortgage. In these cases, you could look at a lifetime mortgage or a home reversion plan instead.
Are retirement interest-only mortgages better than lifetime mortgages?
A lifetime mortgage offers an initial lump sum but you can also set up drawdown facility which will only incur interest once you begin to draw on the facility. This can be used to repay an existing mortgage.
When you take a lifetime mortgage, there are no monthly repayments unlike standard mortgages. Interest roll up leads to a larger outstanding loan which is repaid when the property is sold.
Need mortgage advice? Get in touch with Simmonds Mortgage Services
Getting a mortgage in later life can be difficult. Many lenders are less keen to lend to people who have stopped working. At Simmonds Mortgage Services, we can access the whole of the market to help borrowers find the right RIO mortgage.
Using a mortgage advisor gives you far wider access to the right mortgage provider for your needs and we’ll take all the hard work out of finding the best deal to suit your financial situation. Get in touch with us today.
Frequently asked questions about RIO mortgages
What happens to the mortgage if I die?
If you die while you have an RIO mortgage, the outstanding mortgage will be repaid via sale proceeds. If it’s a joint mortgage, then the loan continues as normal until the last person passes or goes into long-term care.
What happens if I want to move to a new property or a smaller property?
If you want to sell, any outstanding amount will be repaid from the sale proceeds. Some building societies and banks will allow you to port your product to a different property. It always pays to get expert advice on your mortgage options from a qualified broker.
What are the set-up fees for a retirement interest-only mortgage?
You may pay an arrangement fee to the lender, and you’ll also need to use a solicitor to manage the legal side of things, so don’t forget to factor in their costs. You may also need to pay a mortgage valuation fee, a survey fee and a completion fee.
What happens if I don’t make my monthly mortgage payments?
If you do not pay your repayments, your home will risk repossession. You may be able to convert your retirement interest only mortgage into a home reversion plan or lifetime mortgage if you are finding it hard to meet your repayment commitments. A lifetime mortgage allows you not to make payments; instead, you roll the debt up and repay it through your estate when you pass away or go into care and the home is sold.
The downside is that the debt grows as you are no longer paying off the interest, so when the property is sold, the total value of the outstanding loan could significantly eat into the sale proceeds.
Is the affordability assessment different for retirement mortgages?
Affordability checks for a RIO mortgage will look at your retirement income and your monthly outgoings to ensure you can meet the minimum amount for repayment each month.
This is the main difference between a retirement interest only mortgage and an equity release product. There are no checks with Equity Release mortgages as these are based on your age and value of the home.
