The new retirement interest-only mortgage is effectively a middle road between a normal home loan and equity release. Is it a good idea for older borrowers?
If you’re taking out a mortgage at the moment, chances are you’ll go for a fixed-rate deal.
According to the latest data from the Bank of England, a whopping 92.19% of mortgage deals taken out between January and June was on a fixed-rate basis.
That’s the highest proportion since the Bank started tracking the product breakdown back in 2007.
Our love for the fixed-rate mortgage has also pushed lenders to offer ever longer deals, with a record number of 10-year fixed rates available and some lenders even rolling out 15-year options.
But what about fixing your rate for even longer than that? What about the chance to fix your mortgage rate for the rest of your life? One new deal allows some borrowers to do just that.
Considering releasing cash from your home? See how much you'll get using this equity release calculator from Saga
The fixed-for-life RIO
The specialist lender Hodge has launched a new retirement interest-only mortgage (RIO) which comes with a rate that is fixed for life.
So if you end up living for 50 years after you take the deal out, you know exactly how much it’s going to cost you decades down the line.
There are two versions ‒ one at 4.35% with a £995 fee, and a fee-free version at 4.55%. Both allow you to borrow up to 70% of your property’s value.
When you consider that 10-year fixed-rate mortgages are available at sub 3% rates, it's clear you'll be paying a pretty hefty premium for that lifetime fix.
But then it's worth noting that this particular type of mortgages is very different from a traditional deal.
What is a RIO?
RIO mortgages are a relatively new addition to the home loan market over the last couple of years.
The idea is that you pay off the interest on the loan each month, with the actual capital you’ve borrowed paid off when the property is sold once you move into care or pass away.
You can generally overpay on your repayments too, meaning that less of the eventual sale price needs to go on paying off the mortgage, and more can then be passed onto your loved ones.
Essentially it’s an alternative to equity release for people who own their own property but want to release some of the equity they have built up in it but don't want the interest owed to rack up.
A study by Savills last year suggested that around 75% of the housing wealth in the UK is owned by the over-50s.
With plenty of older people are sitting on valuable assets, and a RIO mortgage could help them free up some of that cash.
It might be to supplement their pension savings, to pay for home renovations, or even to gift to a loved one.
The bank of mum and dad ‒ and grandma and granddad ‒ is becoming an ever more important part of the housing market after all, with older relatives now gifting some or all of the deposit used by many first-time buyers.
And a RIO mortgage is one way to do it, rather than wait until you pass on and hand that money over in the form of an inheritance.
Want to look at equity release instead? This calculator will show you how much cash you can free up
The fixed-rate premium
It’s a truism of the mortgage market that you pay a premium for the security offered by a fixed rate. The longer that you know exactly what your mortgage repayment is going to be, the higher that rate is going to be.
And this is certainly the case with RIO mortgages ‒ go for a shorter fixed period and you’ll certainly find a cheaper rate, at least for now.
Hodge itself has a two-year fixed RIO at 3.20%, a five-year fixed at 3.50% and a 10-year fixed-rate at 3.95%, all with a £995 fee.
That’s going to make a fair difference to the size of your repayments. Here’s how they compare on a £100,000 mortgage taken out over a 25-year term.
|
Product |
Interest rate |
Monthly repayment |
|
Two-year fix |
3.20% |
£267 |
|
Five-year fix |
3.50% |
£292 |
|
10-year fix |
3.95% |
£329 |
|
Fixed for life |
4.35% |
£363 |
Yes, it will cost you more each month, but you may decide it’s worth it for the sake of a simple life.
Who can get a RIO?
It’s worth remembering that these deals are very much designed for people in or approaching retirement ‒ you’ll need to be 55 or older in order to qualify for a RIO generally.
What’s more, lenders like Hodge tend to only lend through intermediaries. They want to ensure that you’re picking the most appropriate product for your circumstances, so you will need to get some advice before selecting a rate.
The RIO alternatives
The big difference between a RIO mortgage and equity release is that with a RIO deal you are at least making a contribution towards paying off that debt each month.
With a lifetime mortgage ‒ the most popular form of equity release ‒ there are no monthly repayments, making it more likely that there will be little money left over once the house is sold and the debt paid off to pass onto your loved ones.
You can use this equity release calculator from Saga to give you an idea of how much cash you'll receive and what it'll cost.
Another option is simply downsizing to a smaller property and using the profits from selling the bigger property to pay for that cruise around the world or as a deposit for a loved one.
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