Interest rises in new option for older borrowers
OLDER homeowners struggling to pay off their mortgage now have another way of servicing their debt, as the number of retirement interest-only mortgages (RIOs) rises sharply.
After a slow start, RIO product numbers have doubled in the last year, offering wider choice and lower rates to struggling borrowers.
They are designed to help older borrowers who cannot extend their existing mortgage, because lenders are reluctant to offer deals running beyond age 70.
By contrast, there is no age limit on a RIO. Homeowners can continue to make monthly interest payments until they die or go into long-term care, at which point the property is sold to pay off any outstanding capital, with the surplus falling into the family estate.
Moneyfacts.co.uk finance expert Eleanor Williams said RIOs could be a lifeline for many older, retired homeowners.
Its figures show product numbers have doubled in the last 12 months, with 18 different lenders offering 74 products in total, while the average interest rate fell slightly to 3.47 per cent.
Andrew Morris, senior equity release adviser at over-50s specialist Age Partnership, welcomed the increased choice for those with later life money problems: “RIOs should have an increasing role to play, as plans develop and more providers offer products.”
Equity release schemes are an alternative for cash-strapped older homeowners, and Morris said take independent financial advice to work out which is better for you. “RIOs can help homeowners release larger lump sums, especially at younger ages,” he said.
RIOs also give borrowers the confidence that their debt will not rise, but only if they can afford to maintain payments.
He added: “Also look at other ways of generating extra cash in retirement, such as making sure you claim all your state benefits, or downsizing to a smaller home.”
Mark Finnegan, director at broker Complete Mortgages, said lenders impose strict affordability checks on RIOs to ensure retired owners can afford to service mortgage interest, and most fail to qualify.
“Many go for equity release instead, as this is more straightforward to secure and does not require any affordability checks,” he said.
Typically, you do not have to make interest repayments on most equity release deals. Instead, the interest rolls up and is repaid when you die or go into care.
“Many equity release plans allow borrowers to make optional interest payments to keep the debt down,” Finnegan added.
Matt Burton, managing director of mortgages at specialist lender Hodge, said although not suitable for everyone, RIOs can work for those who have enough income to service their interest payments,” he said. “Read up and understand the different products so that you are well informed before making a decision.”