What is a retirement interest-only mortgage (RIO)?
Retirement-interest only mortgages (RIOs) are a relatively new set of products designed to help older borrowers who may struggle to get a standard residential mortgage. They allow you to borrow against your property and only pay back the interest (and not the loan itself) each month.
RIOs are very similar to standard interest-only mortgages but there are some key differences.
With most RIO mortgages, you only repay the loan when you sell your property, move into residential care or die. But some retirement-interest only mortgages carry terms like a regular mortgage, meaning you either pay them back after a set number of years or when you reach a certain age - 90, for example.
Rather than the onerous steps you have to take to prove your income with a standard residential mortgage, you only have to prove that you can afford the interest.
Some retirement interest-only mortgages allow you to repay some capital as well as interest. This will cut down the size of your loan over time, meaning that more of your property can be passed onto your loved ones.
How much can I borrow with a retirement interest-only mortgage?
Each lender has different limits on how much you can borrow against your property.
If you're borrowing on an interest-only basis, you're likely to be able to borrow less than if you get a deal where you also pay down the loan.
For example, you might be able to borrow 50% of the value of your property on an interest-only basis, or 65% on a capital repayment basis.
There will be other requirements, too, such as a minimum property value, minimum income and minimum loan size.
The amount you can borrow will be based upon an affordability assessment, looking at your income and outgoings to make sure you can keep up repayments once your only sources of income are from pensions, savings or investments, and not employment.
Why might you need a mortgage when you're older?
We are all living and working for longer, but getting hold of a mortgage in your 60s and above can be extremely tough. However, as the list above demonstrates, lenders are increasingly taking a more considered approach when lending to older people.
There are many reasons why older borrowers might want to take out a mortgage:
- To purchase a retirement property which better suits your needs as you get older.
- To release cash from your property to top up your pension income.
- To gift money to a loved one to help them purchase a property.
Another big motivation for some older borrowers is to remortgage away from their existing interest-only mortgage.
These deals were very popular before the credit crunch, and allow borrowers to only pay off the interest on their loan every month, ahead of repaying the capital borrowed in full at the end of the mortgage term.
However, thousands of these borrowers have no plan in place for repaying that capital, leaving them with the prospect of having to sell up and downsize unless they can remortgage.
You can find out more about this in our guide to interest-only mortgages.
Can I get a 'retirement mortgage'?
Lenders consider two different ages when you apply for a mortgage. The first is your age at the time of application. The other is the age you will be at the end of the mortgage, when the debt will be fully repaid.
In the past, lenders have been uncomfortable about lending to borrowers into their retirement years. This was in part due to the tougher affordability tests lenders have to carry out on borrowers following the credit crunch, which force them to look closely at income and expenditure.
While this situation is improving, as lenders begin to adapt to the fact we are all living and working longer, it’s true to say that many lenders have an upper age cap which they will not consider lending beyond.
How can older mortgage borrowers prove their income?
In order to check that you can afford a mortgage in retirement, lenders will carry out a variety of different checks. These vary between lenders.
If you plan to work beyond state pension age, Halifax, for example, will consider your earned income up to the age of 70.
But you'll also need to provide a company pension forecast or annuity statement dated within the last 18 months as well as a state pension statement. If you are already receiving some form of pension income, you’ll need to provide you latest bank statement too.
With Nationwide, it comes down to how close you are to retirement. If retirement is less than 10 years away, it requires details of both your current and anticipated retirement income, and will then use the lower of those two figures for its affordability calculations.
If retirement is more than 10 years away, your current income is used to calculate affordability, but it requires evidence of your pension planning beyond the state pension, such as a pension statement.
Retirement interest-only mortgage vs equity release
Retirement interest-only mortgages share some similarities to equity release, in that they both allow you to tap into your property's value you to access cash.
With equity release, you borrow a portion of the property’s value, but are not required to make monthly repayments (although some deals now allow you to do this).
Instead, the debt is repaid once you die or move into long-term care and the property is sold. These products are typically called 'lifetime mortgages'.
Because you don’t make repayments, the debt grows over time and can erode the value of your property. This is not the case with a retirement interest-only mortgage.
Let's look at an example. You own a property worth £200,000. You want to borrow 50% of this, meaning a loan of £100,000.
In 15 years' time, your property is worth £300,000, and you go into care, so the loan needs to be repaid. The interest rate is 5%.
- Your monthly repayments: £0
- Total value of the loan after 15 years: £211,370
- How much is left after repaying the loan: £88,630
- Your monthly repayments: £417
- Total value of the loan after 15 years: £100,000
- How much is left after repaying the loan: £200,000
- Total amount of interest paid: £75,055
With equity release, there will be less equity in your property to pass onto your family after you've died than with a RIO mortgage.
If you are considering equity release, it’s really important that you get advice from a qualified financial adviser. Find out more in our guide to equity release.