If you are over 50 and having trouble remortgaging your home, a retirement-interest-only mortgage might be a viable option. Remortgaging becomes more difficult with age, especially when you’re nearing retirement.
Retirement interest-only mortgages may also be an option to unlock some home value. This is similar to an equity release plan, but with key differences.
What is a “retirement interest-only” mortgage?
RIO (retirement interest-only mortgages) has two main uses. They are a great option for older borrowers who may be unable to qualify for other types. The principle is similar to a standard interest only mortgage: you borrow against the value your property and then repay the interest each monthly, not the capital.
RIO mortgages are typically repaid only when the property is sold. This could be when you are unable to work or your home becomes uninhabitable. The terms of a jointly mortgage apply to both borrowers. If your partner dies, or moves into care, you don’t have to sell.
RIO mortgages can be easier than regular interest-only loans because they are repaid more quickly. To get a RIO mortgage, you only need to prove that you are able to afford the monthly payments. This is not the interest.
How does RIO mortgages operate?
Helen and Roberto jointly own a property of PS200,000 in market value. They obtain a RIO mortgage to 25% of the property’s value (PS50,000) with 5% interest. The house increases in value over the years and is now worth PS300,000.
Over the 15 year period of their RIO mortgage, they have made monthly repayments of PS208.33, and paid a total amount of PS37,000.00 in interest. Since they didn’t make capital repayments they owe PS50,000 to the lender. This is paid with the proceeds from the sale. They are left with PS250,000.
What’s it like to have a retirement interest only mortgage or a lifetime mortgage?
RIO mortgages, although they look similar to a mortgage for life, are more commonly used as a form equity release. But, there are some important differences.
A lifetime mortgage is only available if your equity exceeds 100%. RIO mortgages, in contrast, can only be taken out if you own 100% of your home’s equity.
RIO mortgages allow you to pay interest as you go. This option is available for lifetime mortgages, but you can also choose to not (in which event the interest compounds instead).
RIO mortgages could be available as early as 50, but may not be available to those who are younger.
As you will have to prove your ability to pay the interest, the application process can be slightly more rigorous than with an interest rolling-up lifetime mortgage.
The only way to get a lifetime mortgage is through an equity release broker, but RIO mortgages may be more readily available.
How can you pay off a RIO loan?
RIO mortgages offer a flexible term unlike traditional mortgages. RIO mortgages are repaid in full when the property sells. You pay monthly interest, but only the principal amount.
It is important to note that some lenders allow you make capital repayments as you go. This is a great option if your financial situation changes. You can also reduce the amount of your loan and decrease your interest payments.
What are some of the benefits of a RIO-mortgage?
Eligibility. For retirement interest-only loans, all you have to do is show you can make the monthly payment.
Affordability. Your income will be less affected by smaller payments. Since the loan term can be extended, there is no need to worry about having it repaid at the end of the term.
Value. RIO mortgages look similar to equity release strategies like lifetime mortgages. You don’t have to make monthly repayments for some of them. They instead ‘roll up the interest’, but this can mean that your debts can quickly grow. A retirement interest-only loan is much less expensive because the interest does not accumulate.
Unlocking value in your home. A retirement interest–only mortgage can give you extra money for your retirement. You can purchase a retirement asset or gift money.
Planning for an inheritance. Because you’ll be paying interest on the loan each month, it’s more likely you will leave something for your loved ones upon your death.
What are the advantages of a RIO-mortgage?
Eligibility. The lender will require you to prove that your income is sufficient to cover the monthly interest payments. This is more difficult if the income you receive is low and if you only own a small fraction of the property. If this is the case, a lender might limit your loan approval to a small amount. This is where a lifetime loan or home reversion might be an option.
You could lose some of your home’s property. Because the loan can be repaid with the proceeds from the sale, your ability to leave money to your loved ones may be diminished.
Repossession. If you don’t make your monthly repayments, your home may be forfeited. If this is the case, you may be eligible to change to an Interest Roll-Up (lifetime) mortgage. This will allow you to pay less monthly but have a higher repayment amount at the end.
Who is eligible for a retirement interest only mortgage?
The terms of the lender will decide if you’re eligible for a RIO-mortgage. You must make the property your primary residence. The lender may insist that the borrower has a minimum amount. RIO mortgages are not required to have any minimum equity.
You must be at least 50 to qualify for a RIO Mortgage. As you get older, however (e.g. You may have fewer options and find it more difficult to make the payments. The minimum income requirement for borrowing a loan is linked to your age.
How can I get a best-retirement interest-only mortgage
Professional guidance is always recommended when looking at a high-value product such as a Mortgage. A qualified financial adviser or broker can help you evaluate all options and help you choose the best solution.
What can I borrow to get a RIO-mortgage?
The amount you are allowed borrow will depend upon the lender’s affordability assessments and the total worth of your home. This applies to more than just your income. It will take into consideration personal and living costs, as well factors that could have an impact on your income or your ability repay.
Your LTV ratio for your RIO loan will also be considered by the lender. LTV ratios of higher amounts are more risky for lenders and you will pay a higher amount in interest.
In order to minimize risk, lenders will typically lend less on interest-only loans than they would on a standard capital mortgage. An example: A repayment mortgage may allow you to borrow 70%, but you might get only 60% from an interest mortgage.
FAQs on RIO Mortgages
What happens to the mortgage if you die? What happens if I die?
After the death of all mortgage holders, the property can be sold and funds used to settle outstanding loans. This also applies if all mortgage holders have moved into longterm care.
What happens to my house if it is time to move?
If you decide to downsize and sell the house, any outstanding debts will be paid out of the proceeds. If you are looking for a larger loan or switching providers, you can also remortgage your RIO mortgage. Porting, which is the process of transferring a mortgage to a property, might be possible. It is possible that you will be charged early repayment penalties.
What is the cost of a retired interest-only mortgage
Fees for different products and mortgage providers vary, but budget for around PS1,000 to PS3,000. There might be an arrangement fee and survey or valuation fees as well as a final fee. For your protection, you’ll need to have a lawyer as well as advice from an independent broker. You’re almost certain to find lenders offering cashback and fee-free options.
What if my income is not sufficient to pay the interest?
You could lose your home if you don’t make your monthly interest payments or have to transfer to an interest-rolling mortgage. As soon as possible, discuss any problems with an adviser.
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