How do RIO mortgages work?
Retirement interest only mortgage are similar to standard interest only mortgage in the sense that you repay the interest accruing on the loan every month, while the amount borrowed stays the same throughout the term.
However, there are two key differences:
1 - With a RIO mortgage, there is no fixed term. The loan will only be repaid upon death, when you move into long term care or when you sell the property.
2 - To qualify for a RIO mortgage, you only need to prove that you afford the monthly interest repayments.
What are the pros and cons of a retirement interest only mortgage?
RIO mortgage and equity release plans do share some similarities. If you take out a lifetime mortgage, the most popular type of equity release, the original capital and any interest outstanding when you move into long-term care on when you die.
However, before deciding which financial product is the best solution for an elderly homeowner such as yourself, it is well worth considering the advantages and disadvantages.
- You can release some of the equity in your home via a RIO mortgage.
- Interest rates on RIO can be lower than lifetime mortgages.
- There is no problem of interest roll-up as there can be with equity release.
- You can downsize or move home, as you can with a lifetime mortgage.
- It is often possible to borrower a larger amount than with a lifetime mortgage.
- The loan term is not fixed.
- You can repay your RIO mortgage early (though early repayment charges may apply)
- Your inheritance may well be greater than with equity release
- You will be required to pass the lenders’ income and affordability checks.
- The amount you can borrow will depend on your retirement income and loan/value ratio.
- As with a lifetime mortgage, any existing mortgage you have must be repaid first.
- Your home will be at risk if you don’t keep up monthly interest payments.
- Interest rates may be fixed in the short term but can go up or down in the future.
- The loan will be repaid when you sell your home, go into long term care or when you die, impacting the amount of your inheritance.
What advice should you take?
If you are considering taking out a retirement interest only mortgage, we would always recommend that you take prior professional advice from a regulated, independent adviser who is a member of the Equity Release Council.
John Whyte is an equity release specialist in the South East with nearly 20 years’ experience of providing solid financial advice. Contact me today for a free, no obligation discussion to start exploring your options to enable you to choose the right scheme for you and your family.