The Broker’s View
Nick Morrey is product technical manager at mortgage broker, John Charcol
What, exactly, is a Retirement Interest-Only (RIO) mortgage?
A ‘Retirement Interest Only Mortgage’ is actually a normal mortgage that is on an interest-only basis aimed at the over 55’s with no end date or maximum age.
They were introduced by the Financial Conduct Authority (FCA) in March 2018 as an alternative to Equity Release mortgages as a secured lending choice for retired borrowers.
Who are RIOs aimed at?
There is no technical minimum age requirement as laid out by the FCA although the target borrower will be 55 or over and some lenders will have that as a requirement.
Do you have to have an interest-only mortgage to take out a RIO?
By definition a RIO mortgage will be on an interest-only basis as the expectation is that it will carry on until the property is sold.
However, most lenders will allow up to 10% per year to be paid off without early repayment charges, so each year you can make payments to reduce the balance.
In addition, when the introductory rate, or product, ends and the mortgage shifts to the lender’s standard variable rate (SVR) there will be no early repayment charge. This is so a borrower can make overpayments to bring the balance down further if desired.
How much money can you borrow with a RIO?
Maximum loan to values (the proportion of the value of the property you need to borrow) vary between lenders from 50% to 70%.
How do borrowers take out a RIO – are there any special conditions?
There are no generic ‘special conditions’ as such apart from those that lenders may impose for their individual products but these mortgages are regulated by the FCA.
How do RIOs compare to equity release?
RIO mortgages are an alternative to equity release mortgages but they are not the same.
For a RIO mortgage the borrowers have to make payments to cover the interest-only cost each month. Equity release mortgages have the monthly interest ‘rolled up’ on top of the mortgage balance each month.
This means that the mortgage balance goes up each month and as the interest payments are added to the balance they get charged interest over time as well.
This sounds ‘bad’ and expensive and in a way it is. But equity release is the perfect option for those who want or need to borrow money in retirement but do not have the means to make monthly payments.
RIO mortgages therefore do not get bigger over time but equity release mortgages do. This may be a problem for beneficiaries of the borrower’s estate – although some would say that is the decision for the borrowers – not the children.
Equity release mortgages often have a fixed rate for the full term of the mortgage whereas many RIO providers only offer two, three, or five year deals (with Leeds Building Society being the main exception with longer term fixed rates).
A fixed rate for the full term provides stability and security which many people like but the rates for equity release are currently a little higher than for RIO mortgages, they are falling a little with the increased market size creating more competition.
One downside to RIO mortgage products is the fact that they need changing every few years (unless the borrower takes a longer term product), which can be stressful and have fees attached to the products and should interest rates rise then the monthly payments could well rise too.
What would you say to anyone thinking of taking out a RIO but who is worried about having a loan in retirement?
If someone is worried about taking out a RIO mortgage then they should talk to a broker who can also advise on equity release mortgages – at least at a basic level.
The problem is that there are not many brokers who are licenced or qualified to advise on both types.
That said, the initial decision often comes down to one question – do you want to or can you make monthly interest payments on the amount you want to borrow?
If the answer is that you do want to make payments then RIOs are a great option.
If not then equity release could well be the better option. Bear in mind that a common reason for releasing equity in retirement is to create funds for children looking to get on the housing ladder themselves and many view it as early inheritance.
If that involves borrowing then people will do what they need to do. My advice would be to do a comprehensive budget planner to establish whether or not you can make payments as that will enable the decision to be made a little more easily.
If they are worried about borrowing in retirement in the first place then they should consider how badly they need the money in the first place, the impact it will have on their estate/beneficiaries and then how to borrow (RIO vs equity release vs a traditional mortgage if possible) or even just downsize to release cash.
Lastly RIOs and equity release mortgages are all regulated by the FCA which wasn’t the case in years gone by, so borrowers have access to things like the Financial Ombudsman Service if they have a complaint.
Is there anything else you think we should know about RIOs…?
Lastly one thing about RIOs is that as the later life lending market as a whole is growing rapidly more lenders are coming to the market.
This will mean it becomes more competitive and we expect to see rates drop and more innovation – for example, Leeds Building Society releasing 10 and 15-year fixed rates.
So there is an argument for someone taking a RIO to go for a two-year or a three-year product in the first instance with the hope that when that products ends the market is more competitive and they get options on better deals at that time.
However, there is no guarantee that this would come to pass. People should consider their options in respect of their circumstances, their current and future needs before potentially ‘playing the market.’
The Lender’s View
Cammy Amaira is the sales and marketing director at the Tipton & Coseley Building Society
When did the Tipton launch its Rio?
In June 2018 – the Tipton was the first building society to offer retirement interest-only mortgages (RIO) throughout England and Wales.
Why did the Tipton enter the RIO market?
Later life borrowing is clearly a growing market and the Tipton is committed to supporting those who are approaching retirement or are already retired. The launch of our RIO mortgage range coupled with removing the upper age limit for standard lending is another step in developing a life cycle of mortgage products aimed at building a long-term relationship with our members
Tell us a bit more about Tipton’s RIO mortgage…?
The Tipton RIO has a range of options that includes support for consumers who are stuck with expiring term mortgages with no method of repayment.
It can assist customers who wish to remortgage, release funds using the equity or borrow on specific property types like retirement homes – those for the 55+ age group only.
The products offer older borrowers an interest-only monthly payment until the borrower dies, moves into permanent long term care, or sells the property, at which point the mortgage is repaid.
Borrowers can use the sale of their home as their repayment strategy provided they have a minimum of 40% equity in their property. And if they wish to gift some equity to a family member, enjoy some holidays or give their home a face-lift with some home improvements, then up to 25% of the property value can be released for these purposes.
The Tipton RIO is for both purchase and remortgage and is available to borrowers aged 55 and over who can meet the affordability assessments by demonstrating sustainable income in retirement.
The society offers a range of both fixed and discounted products, where product fees apply and up to 10% overpayments are allowed each year without charge. The maximum loan-to-value (LTV) – which is the proportion of the value of the house to borrow – is 60%, with mortgages available up to £1million.
And for remortgages, both the standard legal fees and standard valuation on properties up to £400,000 are free of charge.
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