What is a Retirement Interest-Only (RIO) Mortgage?
A Retirement Interest-Only (RIO) mortgage is a type of mortgage that allows borrowers 55 or older, to purchase or refinance a home without being forced to clear the debt by the end of the term. This is because RIO mortgages have no term end and go on until all borrowers on the mortgage pass away or go into long term care. As a result they can be a good option for homeowners who want to stay in their property and cannot afford to repay the debt as they go or have other assets to do so.
However, there is one important thing to keep in mind when considering a RIO mortgage: due to Financial Conduct Authority rules, only one income is typically used to calculate affordability. This means that if you are applying for a RIO mortgage with your spouse or partner, only one of the borrower’s incomes will be considered when the lender is assessing your ability to repay the mortgage. Worse still, it is the lower of the two!
This can be a problem for couples where one or both partners have relatively low incomes. If only one income is used to calculate affordability, the couple may not be able to borrow as much money as they would like.
There are a few reasons why lenders only use one income to calculate affordability for RIO mortgages. First, it is important to remember that RIO mortgages are designed to be repaid over the lifetime of the homeowner. This means that the lender needs to be confident that the homeowner will be able to afford to repay the mortgage even if one of the borrowers were to pass away during the mortgage term.
Second, RIO mortgages are interest-only mortgages. This means that the homeowner only pays back the interest on the loan each month. The capital balance of the loan is repaid when the homeowner dies or moves into long-term care.
If both incomes are used to calculate affordability, there is a risk that the homeowner will not be able to afford to repay the mortgage if their spouse or partner dies or becomes unable to work. This could lead to the homeowner having to sell their home to repay the loan.
There are a few things that couples if they find that they cannot borrow the amount they need using a RIO mortgage.
- Choose a long term ‘regular’ mortgage. Some lenders off ‘regular’ interest only and repayment mortgages with terms of up to 40 years. By having a defined term end, the FCA rules around ‘survivorship’ do not apply. This allows the lender to use both incomes for affordability. For borrowers 55 plus this takes borrowers past life expectancy anyway, so could be considered a make-shift RIO mortgage anyway.
- Choose a ‘lifetime mortgage’ Lifetime mortgage borrowing is based on clients age and equity in the property. The older the youngest client is and the more equity in the property, the more you can borrow. Therefore for older clients with lots of equity, but low income, a lifetime mortgage often results in higher mortgage borrowing than a RIO.
- Consider taking out a smaller loan. If you are concerned about affordability, you may want to consider taking out a smaller RIO loan. This will reduce your monthly interest payments and make it easier to repay the mortgage if your income decreases.
If you are considering a RIO mortgage, it is important to weigh the pros, cons and alternatives such as those above, carefully and to speak to a mortgage advisor to get personalized advice.
Read more here on our later life lending guide which details all the options to check and how to make sure you choose the right one.