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12 Sep 2019

Will new 'fixed-for-life' retirement interest-only mortgage save you money?

Hodge Bank launches 'Rio' mortgage with permanent fixed interest rate of 4.35%

A new retirement interest-only mortgage (Rio) has been launched offering a 'fixed-for-life' interest rate, meaning you could potentially lock-in your rate for more than 50 years.

Available to borrowers aged 50 and over, Hodge Bank's new product is the latest addition to the growing Rio market, following Nationwide's expansion of its later-life lending range in August.

Here, we look at how Hodge's new mortgage compares with the rest of the market, and whether fixing your interest rate for the rest of your life is really the best option.

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How does the 'fixed-for-life' Rio work?

Hodge's new mortgage is quite straightforward. Borrowers will get a fixed rate for the entire duration of the mortgage.

If you pay a £995 arrangement fee, that rate will be 4.35%. It's 4.55% if you opt for the fee-free version. Keep in mind that the higher rate could cost you thousands of pounds extra in the long run.

Both versions of the mortgage let you borrow at up to 70% loan-to-value (LTV), making it more generous than many Rios from other providers, which are typically capped at 50-60% LTV.

You can only get this new product through a mortgage broker, who should also talk you through other options and offer you advice.

As is typical with Rios, you only pay the interest on your mortgage each month. You'll pay off the full capital balance when you die or move into long-term care, usually by selling your home.

Will fixing your rate for life save you money?

As you can see from our recent round-up of the best Rio mortgage rates, Hodge's 4.35% offer doesn't come close to the top of the Rio rates table.

You can get a Rio with a rate as low as 2.79% from Marsden Building Society, or 2.99% from Nationwide.

However, these mortgages' rates aren't fixed forever. Marsden's 2.79% mortgage is only fixed for two years, after which it reverts to the lender's standard variable rate (SVR) which is currently 6.2% - more than double the original rate.

Nationwide's 2.99% deal also has a jump after two years, climbing to the current SVR of 4.24%. This is actually lower than Hodge's lifetime fixed rate, but unlike fixed rates, SVRs can rise or fall over time.

Some Rios have fixed rates over longer periods, but longer fixes generally have higher initial rates. Leeds Building Society's 15-year Rio, for example, is fixed at 4.34% before reverting to an SVR.

With the new Hodge Bank deal, you know you're getting 4.35% (or 4.55%) for as long as you have the mortgage - not just for a two-year introduction. You might decide that the security this offers in uncertain economic times is worth paying extra for.

Comparing like with like

It's hard to compare mortgages that have changing interest rates with mortgages that don't. That's why lenders are obliged to provide an annual percentage rate of charge (APRC) for each of their products.

An APRC is the interest you would pay over a mortgage's entire term, including fees, initial rates and SVRs, if you didn't switch deals at any point. The table below has a few of the mortgages we've mentioned so far, ordered by lowest APRC.

In this table, Marsden's two-year mortgage, which has the lowest initial rate of any Rio, doesn't actually fare too well. It's Nationwide's two-year Rio that comes out on top, followed by the Hodge Bank Rios.

This is at least in part because Nationwide's SVR is lower than Hodge's fixed rate.

Is remortgaging a better option?

Remortgaging when your initial period ends will render an APRC almost meaningless. If you don't stay with your mortgage for its entire term, you don't need to know the interest you'd pay over its duration.

As Which? research from last year revealed, switching to a new mortgage when your initial rate period comes to an end could save you thousands of pounds a year. This is because SVRs tend to be far higher than initial rates.

As more lenders enter the market, there are more Rios than ever to choose from. This should make regular remortgaging a little easier, even if it might be unrealistic to attempt to do it until the day you die.

If you were to switch between the top three two-year fixed-rate mortgages, borrowing £100,000 each time, you'd pay £17,780 in interest over six years. If you stuck with Hodge's fixed rate for six years, you'd pay £26,100. (Note that this doesn't account for any arrangement fees.)

Since the point of a Rio is that you don't have to pay it off for as long as you live, you might want to stop the frequent remortgaging and stick with one product eventually. That's where Hodge's Rio could come in.

While it is possible to find a lender with an SVR lower than Hodge's lifetime fixed rate, SVRs can change but this fixed rate will not. So it does offer more security than other Rios, even if it's not the cheapest option based on current SVRs.

Is a retirement interest-only mortgage for me?

If you want your children to inherit your home, a Rio might not be for you. This is because, unless they can get the money from elsewhere, your estate's executor will have to sell your home to pay off the mortgage.

There are other ways you can 'unlock' some of your property's value in order to pay off a repayment mortgage or to fund your retirement.

Equity release through a lifetime mortgage is similar to a Rio, in that you usually sell your home when you die to pay for it. The difference is that you don't pay off capital balance or interest each month. Interest still builds up, however, making the final settlement very expensive.

You could also sell your home while you're alive and downsize to a smaller property, or a similar property in a cheaper area. This way you'll have cash to spend and no mortgage to pay.