Retirement Interest Only (RIO) mortgages and the new residential option between normal Interest Only and Equity Release

With people living and working longer, it is inevitable that there will be more elderly homeowners who still have finance secured on their properties.

This does create its own mortgage genre and is the highest growing mortgage market in recent years. As a result, some lenders have tried to be more innovative in their options.

Lifetime mortgages, also known as equity release, have been around for some years now. However, as with all mortgages, recent regulation has made them very different to what was on offer at the turn of the century.

The principle is simple. If you are aged 55 or over, you can borrow a certain amount against your property, even if it’s to purchase a new one. No proof of income is required, and neither is a credit score.

How much can you borrow?

The amount a lender will loan is based purely on the valuation and the age of the applicant or applicants.

The older the applicant, the higher the percentage they can borrow, typically up to a maximum of 49% of the lender’s valuation of the property.

Traditionally, these types of mortgages had no monthly repayments; the lender would accumulate interest until the death of the last applicant.

However, in recent years, many options have developed, giving the homeowner the opportunity to potentially trade down and repay, to borrow more if needed and if available and to make repayments. Thus, not leaving the cost of the mortgage to be taken from their estate after their death.

This works very well for older retired homeowners who have agreed with their dependents that they are happy to do this or for those who have no dependents; because ultimately the cost of borrowing is added to the loan and is repayable upon the sale of the property, if the homeowner goes into care or upon death.

RIO mortgages

Some mortgage lenders will allow older borrowers to take a traditional interest only mortgage; potentially, up to age 90 though typically to age 75. This is based on their income whether it be pension income or any other form, and the repayments must be deemed affordable for the individual by the lender.

A credit score, valuation and proof of income are required.

RIO mortgages are a variation on traditional interest only mortgages and still require clients to pass affordability and credit checks.

They must still commit to monthly payments; however, these mortgages are specifically designed for those of retirement age and older. Therefore, where a lender on a traditional interest only mortgage may have set restrictions on age or other matters, RIO mortgages do not have an age restriction so long as the client fits the criteria already mentioned.

At the moment, less well known and niche lenders offer this facility, although major high street lenders are poised to get involved.

In fact, Nationwide are very close to entering this market.

Euxton can give advice on all types of mortgages so if you’d like to chat things through over a cuppa, why not pop in to see us?

December 2018