The long-held expectation that people will be mortgage-free by their planned retirement date isn’t realistic for many of today’s homeowners. In previous generations people bought a house in their twenties or thirties and paid it off by the time they retired. This is no longer the case. Generations later and we are marrying, having children and buying homes later on in life. We are also generally living and working for longer.
As a result of changing lifestyles, more people of retirement age need to borrow for longer, which means paying a mortgage until much later in life. However, many lenders have until now, been wary about lending into retirement, even where someone has plenty of equity in their property, has never missed a mortgage payment, is still earning well, and has a good credit score.
Older borrowers have always had a limited choice when it comes to standard borrowing, and even when they are able to get a mortgage, they often find repayments soar, due to the reduced term offered. Hwew, we take a look at Retirement Interest-Only Mortgages and examine the pros and cons.
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Retirement Interest Only Mortgages
More recently, retirement interest-only mortgages (or RIO mortgages) have become a thing. They are aimed at older borrowers who are unable to completely pay off their mortgage by the time they are ready to retire. These are specialist mortgages that enable borrowers to make interest-only payments throughout their retirement, then using the sale of their property to repay the outstanding debt.
What Is A Retirement Interest-Only Mortgage?
A retirement interest-only mortgage is only available on your main residence. It is very similar to a standard interest-only mortgage only with two key differences.
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The loan is usually only paid off when you die, move into long term care, or sell the property.
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You only need to prove you can afford the monthly interest repayments.
There are no minimum age requirements but RIOs are generally aimed at older borrowers, such as the over 55s and pensioners who might find it easier to qualify for than a typical interest-only mortgage.
In a sense, they are similar to some types of equity release schemes, like a lifetime mortgage, where you pay-off the original capital and any interest when you die or move into long-term care.
However, with a lifetime mortgage you will either:
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Have a larger sum to repay at the end as there are no monthly repayments, meaning the interest gathers and is then added to the total loan value,
or
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Make monthly interest payments and capital repayments whenever possible during the term of the mortgage. This would reduce or halt the interest gathering but would mean higher monthly repayments.
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Why Take Out An ROI?
ROI mortgages can be useful if you currently have a mortgage deal that is coming to an end as they can help to keep your monthly outgoings low into retirement.Rather than using savings or your pension to pay off the balance of your mortgage, you use your money to enjoy your retirement, pass it on to your family or simply keep it in savings for the future.
The repayments on ROIs are much lower than those on a standard repayment mortgage as you’re only paying the interest on the outstanding sum, rather than trying to reduce the overall debt. You also don’t have to worry about trying to save to repay the outstanding debt as this will be taken care of with the sale of the property when it is no longer needed.
If you’re coming towards the end of your current interest-only mortgage, talk to your lender to see if they will extend your mortgage term / remortgage you into retirement. You can also talk to an independent mortgage broker about the next steps you could take.
How Do Retirement Interest-Only Mortgages Work?
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There’s no minimum age requirement, however, they are mainly aimed at the over 55s.
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Just like any other mortgage, you must pass the affordability checks to ensure you can make the monthly interest-only repayments.
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ROIs are only available on your main residence.
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You only pay the monthly interest on the outstanding balance.
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Some providers offer these mortgages to the over 55s, others have a higher minimum age.
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Deals often come with a maximum 60% loan-to-value (LVT), meaning you need to own at least 40% of the property outright.
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The loan is usually only paid off when you die, move into long term care or sell the house.
Pros And Cons Of A Retirement Interest-Only Mortgage.
Pros
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Cheaper repayments
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Available for older borrowers
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No need to demonstrate a suitable plan for repaying the mortgage.
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More likely to have something to pass on as inheritance.
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Avoid having to downsize to a smaller property.
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The loan term is not fixed.
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Generally cheaper when compared to most Lifetime Mortgages.
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You can unlock some of the equity in your home to pay off outstanding debt.
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The capital is only repaid when you die, move into care or sell your property
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The interest isn’t compounded as it is with equity release
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Some lenders give you the option to repay some of the capital each year
Cons
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You will need to pass the mortgage affordability checks
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Your home will be sold off to repay the loan when you die, enter long-term care or sell your home. Thi will affect your family’s inheritance.
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Your home is at risk if you do not keep up the repayments.
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The amount you can borrow is based on your retirement income and your loan to value ratio.
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Loan to value is lower compared to other mortgages
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The interest rate is only fixed for a number of years so your payments could increase
Conveyancing Expert are a team of solicitors based in Manchester who offer the highest quality conveyancing services. For your free, no obligation conveyancing quote just CLICK HERE.