Retirement Interest Only Mortgage (RIO) - mortgage for over 50s

Although a mortgage in the UK is best taken out when you are in your 30s or 40s, there are financial products on the market dedicated to 50-year-olds and even retirees. Such solutions in the UK are called Retirement Interest Only Mortgages (RIOs). Let’s find out what this particular type of product is all about and whether it’s worth opting for.

What is a retirement interest-only mortgage?

RIO mortgage and rental property in the UK

RIO mortgage - advantages and disadvantages

Advantages

Disadvantages

Is it worth taking out a retirement mortgage with interest-only repayments?

What can be done to make the RIO mortgage pay off?

What is a retirement interest-only mortgage?

A retirement interest-only mortgage, because this is how the acronym RIO should be translated, is a type of mortgage in which only the interest on the capital borrowed is repaid and, as a product, it is dedicated to people over 55 years of age. In the vast majority of cases, it is offered as part of a remortgage. You can opt for a RIO both if you have been paying a regular mortgage up to now and if you have been using an interest-only mortgage.

RIOs resemble in part a classic interest-only mortgage, but they are certainly not identical products. According to the government’s Moneyhelper, Retirement interest-only mortgages are only available for the purchase of the property in which the applicant will live - so there is no question of financing the investment with a view to later renting it out.

In addition, it is sufficient that your creditworthiness allows you to pay the interest - due to the absence of the capital part of the instalment, the amount of your monthly commitment will be significantly lower. In practice, this results in the possibility of buying a really large property, because instead of the standard 4.5 times your annual earnings, it is realistic to borrow up to 80% of a larger amount, which we will come to in a moment.

Typically, a RIO mortgage is repaid upon the death of the borrower or the sale of the financed property. This is a big difference from standard interest-only mortgages, in which, at the end of the term, you enter into another agreement, or buy back the property with the cash you have saved. In addition, many RIO mortgages do not have a strict termination date.

Theoretically speaking, there is no provision that sets a lower age limit for applicants - at 30 years old you can also apply for such a mortgage, although we do not think this is justified.

RIO mortgage and rental property in the UK

In a way, mortgages with interest-only repayments are akin to renting - despite paying regular instalments, at the end of the contract you do not become the independent owner of your property. It may seem that this solution is therefore completely unprofitable, but this is not true.

First of all, the instalments on a RIO mortgage can be really low. For example, with a 40% deposit, you will get an interest rate of around 5.6-6%. Assuming the not-so-optimistic option (APR of 6.00%), the instalment for a £300,000 house will be just £750. This is clearly less than for renting.

Interest rates on mortgages with capital repayments are gently lower, it’s true. However, bear in mind that your repayments will be much higher because, over the course of the contract, you will have to pay back to the bank the £100, £200, or £300,000 you decide to borrow. This, in turn, means you won’t be able to save that money, which could be a problem when you want to retire.

In addition, banks are reluctant to grant standard mortgages to people who will still be repaying them after retirement. Leaving aside the risk of the borrower’s death, the income of inactive people is simply low. Statistics 2022 shows that the average net income of a pensioner is 68.5% of the average income of a working person after tax. That’s a colossal difference and unless you’re making really big pension contributions, your benefit may simply not be enough to repay the mortgage. Banks don’t like risk, so typically, you’ll have to make your last instalment at 65.

It appears, therefore, that RIO mortgages are basically the only solution available to many people.

RIO mortgage - advantages and disadvantages

Like any financial product, the retirement interest-only mortgage has both advantages and disadvantages.

Advantages

• The instalments of such a mortgage are relatively low;

• Mortgage agreements are usually concluded for an indefinite period;

• RIO mortgages are generally cheaper than lifetime mortgages;

• Lower instalments are a good way to save money yourself by investing - with the right skills, you potentially may be able to achieve rates of return that exceed the interest rate on your mortgage, thus generating a profit. Remember, however, that you can lose out on any investment;

• Statistically speaking, property prices tend to rise over the long term. You may find that at the end of the financing period you will be left with a large difference between the sale price and the loan amount, which will actually be a profit for you and your family;

• No age limit for the borrower.

Disadvantages

• Your affordability will be estimated based on your pension income, which is generally low;

• The LTV (Loan to Value) ratio of these mortgages is relatively low - you will be able to borrow around 60% of the value of your home;

• After you die or move to a retirement home, your home will be sold to repay the mortgage. The difference between the amount owed and the funds from the sale of the property will go to your heirs;

• By choosing a RIO mortgage, you will pay instalments on your home for the rest of your life.

Is it worth taking out a retirement mortgage with interest-only repayments?

First of all, the answer to this question is not clear-cut, and it will be best if you contact a mortgage broker who can advise you carefully on choosing the right financing for your property.

However, if we are to broach the subject on the blog, let us analyse a few factors that are relevant to this issue.

First of all, RIO mortgages are dedicated to people who have already repaid interest-only mortgages - a natural continuation of this financing model. In our opinion, converting a “normal” mortgage into a RIO mortgage misses the point a little, as you have most likely managed to repay some capital and it is worth continuing to do so in order to enjoy total financial freedom in your old age and not have to pay either mortgage instalments or rent to your landlord.

Certainly, RIO mortgages are also much better than so-called interest roll-up mortgages, which we believe can lead to serious financial problems in old age. This is due to the mechanism of compound interest - the accumulating interest can, in extreme cases, exceed the value of your home. From our observations, this group of products has a very negative impact on inherited estates because, colloquially speaking, it involves the overtaking of assets often collected over a period of years.

The situation is slightly different if you invest a lot and know that you are more than likely to make use of the savings from paying lower instalments on your mortgage. This may be a good strategy, but be aware of the risks associated with investing in equities, cryptocurrencies and other assets.

What can be done to make the RIO mortgage pay off?

First and foremost, consider overpaying it. With interest-only mortgages, every pound you pay in lowers the instalments on your mortgage and puts your household budget in a little better shape the following month, and with that said, most banks allow you to make overpayments of 10% of your mortgage balance at no extra charge. Lower instalments mean a greater level of financial security and the opportunity to realise your dreams sooner.

Also remember to keep a regular eye on interest rates - although some banks offer products where the interest rate will remain fixed until the end of the contract, most RIO mortgages have a fixed rate for the first 5 years, after which they become so-called tracker products, so on a variable rate. Before that point comes, it is worth remortgaging - it will pay off in the vast majority of cases.