The short answer is yes. Lenders realise that many people choose to continue working past typical retirement age, and that others still have mortgage debt from previous arrangements. As such, they provide options to suit – albeit more limited. If you're approaching retirement and still have an interest-only mortgage you're not sure how you'll pay off (or you want to remortgage for any other reason), taking out a retirement interest-only (RIO) mortgage could be an option.
A possible alternative to equity release and a way to clear your current mortgage debt without needing to downsize, a RIO mortgage works in a similar way to traditional interest-only deals and can be very helpful in obtaining a mortgage in retirement. So, is now the time to consider one?
A RIO mortgage is a way for older homeowners to borrow in retirement. Much like with a standard interest-only loan, borrowers only need to repay the interest rather than the capital – which can be a lot more achievable for those on a pension income. However, there’s usually no set repayment date; rather, when the borrower dies or goes into care, the house will be sold and the mortgage repaid, with any additional value in the house forming part of your estate.
Yes, and this is the key reason that RIO mortgages were introduced. After the boom of interest-only deals in the 80s and 90s, their popularity quickly plummeted when endowments, house prices and investments did the same in the midst of the financial crisis. People found themselves with a ticking time bomb of a mortgage they had no way of repaying, many of whom were approaching retirement, so rather than see huge swathes of borrowers losing their homes, the industry responded – and so the option of extending an interest-only mortgage into retirement came into being.
RIO mortgages allow homeowners to remortgage their existing loan under similar terms to their current interest-only arrangement, avoiding the cliff edge that’s the common feature of traditional interest-only loans. But this isn’t the only reason people choose such mortgages; some may choose to take a RIO mortgage outright, perhaps to release cash tied up in their home or to fund a move to a more suitable property.
Either way, a key benefit of this kind of mortgage is that there aren’t as many affordability checks than with a standard mortgage; all you have to do is prove you can afford to repay the interest. As such they can be a great choice for those who need to borrow in retirement, but particularly for those who don’t have any other means of repaying a previous interest-only deal.
RIO mortgages are essentially a hybrid of interest-only and equity release, and work by combining the two. Initially, the interest-only arrangement results in lower repayments than if you had a full capital and interest deal, then the mortgage is eventually repaid when the house is sold.
Yet even here, there are options. Some providers allow borrowers to repay part of the capital as well as the interest, which although it results in higher repayments, will mean that more of an inheritance can be left to loved ones. Others offer set repayment dates, rather than having an unrestricted term. A lot of big-name lenders now offer these retirement mortgages, too, giving peace of mind to those who would prefer to borrow from a high street bank or building society, so there are plenty of options for those seeking to borrow in later life.
There are several lenders that offer RIO mortgages, the vast majority being mutuals and challenger banks. Nationwide is perhaps the best-known high street name in the sector, though others include Post Office Money, Nottingham Building Society, Shawbrook Bank, Leeds Building Society, Family Building Society and Hanley Economic. For a full overview of the lenders operating in the space, and to consider your options on a more personalised basis, speak to a mortgage broker.
Ultimately, RIO mortgages could be a great option for those unsure how they're going to repay their interest-only mortgage debt, but as with any mortgage decision, it’s important to get impartial expert advice from a financial adviser before committing.
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