The later life lending marketplace is not only seeing a raft of new lenders, there are also new product options to give customers increased choice.
Retirement Interest-Only mortgages (RIO) are one such example and are a relatively new introduction. They provide an opportunity to take out a new mortgage into your retirement years.
A RIO requires borrowers to pay the monthly mortgage interest until they die, sell their home or go into long-term care. At this point the loan is repaid by selling the home. So, you need to be confident that you have an income stream to meet this cost.
The upside of paying the monthly interest, is that you’ll avoid any interest roll-up. Also, with a RIO the payments are limited to the interest charge, so you would not be required to start paying off some of the capital too.
However, this may be the case with some Later Life mortgage products, which are also tailored to meet the needs of this sector. For example, a Retirement Capital and Interest mortgage (RCI) allows you to borrow money released from your home. However, by the end of the term you need to pay off all the capital borrowed, plus interest.
Affordability for a RIO is a big consideration, particularly if you apply jointly, as both individuals would be assessed in light of possibly reduced pension payments should one partner die.
How they are set up
With a RIO the loan-to-value could go up to around 60% (far more than an equity release plan, particularly for the borrowers aged 55 to 65), with the option of fixed, variable, and discounted rate deals. The minimum age at which you could take one out varies amongst lenders from 55 up to starting at around 65.
Part of the drive to develop this offering is a recognition that nearly one in five of all standard mortgages are already on full interest-only and part capital repayment deals, with many coming to the end of their term over the next few years.
(Source: Financial Conduct Authority, January 2018)
New opportunity for some
Some older potential borrowers may have previously been excluded from further borrowing because of their age, despite having an income stream which would normally be acceptable. In this instance, a RIO meets that need, by accepting that the sale of the property is a viable repayment method.
Lasting Power of Attorney
As clients taking out a RIO would have to pay interest across the whole term period, it may make sense to have a Lasting Power of Attorney (LPA) in place, which would protect them, and their family, if they can no longer manage their finances. This will allow your family members to take care of your financial affairs if you become mentally incapacitated. Also, some lenders offer lower interest rates if you have an LPA in place.
Retirement Interest Only Mortgage vs. Equity Release
To some extent it’s not simply opt for one or the other, as some may take out a RIO when they have the disposable income, meaning they can meet the affordability requirements.
Later in life, their situation could change. In which case, an equity release plan, where no further monthly payments are needed, with no affordability hurdles to counter, may be the better solution.
Understandably, it’s all pretty complex, so please do get in touch.
The content of this article is for general information only and should not be considered advice. Professional advice relating to your individual circumstances should always be sought prior to making any decisions or taking any action. Equity Release is not suitable for everyone. You should seek advice to ensure that you fully understand all implications for you and your home and for anyone who might otherwise inherit the property. Your home may be repossessed if you do not keep up repayments on your mortgage. All details were correct at the time of writing.
Reference – BL061 – May – 2019