The later life lending marketplace is not only seeing a raft of new lenders, there are also new product options to give customers increased choice.
Retirement Interest-Only mortgages (RIO) are one such example, and are a relatively new introduction. They provide an opportunity to take out a new mortgage into your retirement years.
A RIO requires borrowers to pay the monthly mortgage interest until they die, sell their home or go into long-term care. At this point the loan is repaid by selling the home. So you need to be confident that you have an income stream to meet this cost.
The upside of paying the monthly interest, is that you will avoid any interest roll-up. Also, with a RIO the payments are limited to the interest charge, so you would not be required to start paying off some of the capital too.
However, this may be the case with some Later Life mortgage products, which are also tailored to meet the needs of this sector.
Affordability for a RIO is a big consideration, particularly with a joint application. Both individuals would be assessed given the possibly of reduced pension payments should one partner die.
How they are set up
With a RIO the loan-to-value could go upto around 60% (far more than an equity re-lease plan, particularly for the borrowers aged 55 to 65), with the option of fixed, variable, and discounted rate deals. The minimum age at which you could take one out varies amongst lenders from 55 up to starting at around 65.
Part of the drive to develop this offering is a recognition that more than one in six of all standard mortgages are already on full interest-only and part capital repayment deals, with many coming to the end of their term over the next few years.
(Source: Financial Conduct Authority, January 2018)
New opportunity for some
Some older potential borrowers may have previously been excluded from further borrowing because of their age, despite having an income stream which would normally be acceptable. In this instance, a RIO meets that need, by accepting that the sale of the property is a viable repayment method.
Lasting Power of Attorney
As clients taking out a RIO would have to pay interest across the whole term period, it may make sense to have a Lasting Power of Attorney (LPA) in place, which would protect the borrower, and their family, if they can no longer manage their finances.
RIO vs. Equity Release
To some extent it’s not simply opt for one or the other, as some may take out a RIO when they have the disposable income, meaning they can meet the affordability
Later in life, their situation could change. In which case, an Equity Release plan, where no further monthly payments are needed, with no affordability hurdles to counter, may be the better solution. And remember, additional protections are afforded to Equity Release plans.
Understandably, it’s all pretty complex, so please do get in touch.
■ For Equity Release, we provide initial advice for free, and without obligation.
■ The contents of this article are believed to be correct at the date of publication (Jan. 2019).
■ Every care is taken that the information in this article is accurate at the time of going to press. However, all information and figures are subject to change and you should always make enquiries and check details and, where necessary, seek legal advice before entering into any transaction.
■This article is for information only and does not constitute advice. You should seek professional advice tailored to your needs and circumstances before making any decisions.