Those approaching or in retirement and looking to borrow money have a number of options, but two of the most popular are equity release and retirement interest-only mortgages (RIOs). As the economic fall-out from the Coronavirus pandemic continues to impact consumers of all ages, we’ve looked at the differences between equity release and RIOs and how borrowers can decide which is the best option for their circumstances.
Both equity release and RIOs are specifically designed for later life homeowners looking to borrow money. But this is where the similarities between these products end and, as such, borrowers considering equity release or a RIO product should carefully think about the two options before deciding on the best way to borrow.
A RIO deal enables borrowers aged 50, or more usually 55, or over to have a mortgage on their home and make interest-only monthly repayments until their death or at the time they permanently move into a care home. This is an important condition of RIOs, as many providers now offer mortgage products with terms that end later in life, such as 80 years of age or more, but at this age, the borrower will have to repay the mortgage in full. Apart from the term of the mortgage, a RIO works in much the same way as a residential mortgage and borrowers will need to ensure that they meet the repayments or they could lose their home.
Between February 2019 and February 2020, six new providers entered the RIO market, which resulted in 36 more products being available for borrowers. As well as more competition entering the market, the average rate on RIOs fell year-on-year, from 3.50% in February 2019 to 3.47% in February 2020. Although the Coronavirus pandemic has impacted the RIO sector, since February two more providers have entered the market and the number of products available has increased by 17, to stand at 91. In addition to this, the average rate on RIOs has also fallen, now standing at 3.29%. Although the RIO market looks highly competitive at the moment, it should be noted that, as with the mortgage market in general, it is highly volatile and those looking for a RIO should consider going through a mortgage broker to find the best deal available for their circumstances.
|Retirement interest-only mortgages|
|All fixed and variable rate products||February 2019||February 2020||July 2020|
|Number of products||38||74||91|
|Number of providers||12||18||20|
Equity release has been specifically designed for equity rich but cash limited homeowners by enabling them to withdraw either a single lump sum or income from their property. Drawdown is also available from many providers allowing the total amount available for borrowing to be agreed at the outset but then taken in smaller amounts as and when required. Equity release allows homeowners to release money from their property but they do not have to make any repayments, including interest-repayments, until their death or at the time they permanently move into a care home. Borrowers can reduce the overall amount owed by choosing an equity release product that allows monthly payments of some or all interest that is payable, or which permits partial repayments up to a specified limit (usually 10%) without incurring an early repayment penalty.
For all product options, equity release avoids the risk of homeowners losing their home. It should be noted, however, that where interest is accumulated on the loan during the borrower’s lifetime it could mean that when their property is sold, all the money is used to repay the equity release. In addition, providers that are members of the Equity Release Council adhere to a set of rules including a ‘no negative equity guarantee’ which means that even if the proceeds of the property sale is not enough to repay the outstanding loan to the provider, neither the borrower or their estate will be liable to pay any more.
Equity Release providers offer a wide selection of products to meet the needs of borrowers and speaking to an independent financial adviser can help in deciding the best option for their individual circumstances.
Up until the Coronavirus impacted the UK economy, the equity release market had become increasingly competitive, with 208 more products available in March 2020 compared to May 2019. While May 2020 saw a slight drop in equity release products, falling to 357, it seems that the market has started to recover, with 463 available in July, an increase of 49 since March.
|Equity release market analysis|
|Lifetime equity release deals||May 2019||March 2020||April 2020||May 2020||July 2020|
|Number of deals overall||198||406||423||357||463|
|Average rate overall (fixed and variable)||5.00%||4.20%||4.23%||4.34%||4.27%|
|Average max LTV %||47%||48%||48%||49%||47%|
While both the RIO and equity release markets seem to be making a fast recovery, before making a decision whether to choose RIO or equity release, it is important to take individual circumstances into consideration. Below, we have outlined some of the most common reasons to consider equity release or RIO and what is the best product for each scenario may be.
For those reaching retirement and who still have a mortgage to repay, for example if they have only been making interest repayments during the term of the mortgage, a RIO product is usually the best option. A RIO product will enable retirees to continue making interest-only repayments and not have to worry about repaying the mortgage in full during their lifetime or until the time they permanently move into a care home. But, as already mentioned above, repayments have to be kept up-to-date or the borrower could risk losing their home.
As part of retirement planning, or discovering that a pension will not meet retirement living costs, homeowners can consider equity release. Equity release is usually taken as a lump sum, although there are some options now that enable smaller amounts to be borrowed at different times, which retirees can use to boost their pensions. Borrowers should note that the amount that is lent through equity release is often dependent on age, with those who are younger being offered smaller amounts than older borrowers.
A lot of retirees want to gift their children and grandchildren with a lump sum of money during their lifetime and those wishing to pass on a lump sum during retirement often opt for equity release. Equity release enables retirees to withdraw cash from their property, which they can then pass to their children and/or grandchildren without having to repay the money until their death or the time they move into a care home.
Those looking to provide short-term financial help for their children, with the intention of the money being repaid, could consider a RIO product. This will enable the borrower to release a small amount of money from their home but enable them to repay the loan after a short period of time. Those considering this should ensure that the terms and conditions of the RIO allow this to be done.
Those looking to borrow in retirement but who still want to ensure that the inheritance they leave behind is not impacted need to think carefully about their options. As interest repayments are made on RIOs, it means that interest is not accumulated throughout the borrower’s lifetime and, as a result, is not taken out of the sale of the property. While normally interest does accumulate with equity release, which could result in no inheritance being left after the sale of the property, there are some options that enable interest repayments to be made during the borrower’s lifetime.
Before taking out either a RIO deal or equity release, a borrower should speak to an independent financial adviser who will be able to provide advice on the best options for their situation and circumstances.
As equity release will impact the inheritance left behind once the property is sold, a solicitor and family members are required to be part of the sales process. With a RIO product, there is the risk of the borrower losing their home if repayments are missed and, as such, affordability checks are carried out, including checks on affordability if the rate rises.
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