Does your client need a RIO mortgage?

  • Define what a retirement interest-only mortgage is
  • Describe who a RIO mortgage is suitable for
  • Outline some of the factors one has to take into account with a RIO mortgage
Does your client need a RIO mortgage?

Retirement interest-only or RIO mortgages are for people aged 60 and over who are looking to release some equity from their home.

RIO mortgages allow homeowners to remortgage their existing loan under similar terms to their current arrangement, meaning they only need to repay the interest for the term of the loan.

This is more achievable for those on a pension income.

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Then when the borrower dies or goes into long-term care, the property will be sold, and the mortgage repaid with any additional value in the house forming part of the borrower’s estate.

RIO mortgages could be the best option for those unsure how they are going to repay their current interest-only mortgage debt.

How and why did it come about?

In March 2018 the Financial Conduct Authority (FCA) relaxed the rules and separated RIO mortgages from equity release, thus making such loans more appealing in the process.

The FCA reclassified RIOs as standard mortgages as they had previously been classed with equity release as lifetime mortgages.

The FCA changed the terms of the Mortgage Credit Directive because RIO mortgages are a simpler product than equity release and do not involve interest mounting up for borrowers.

After consultation, the mortgage industry backed the changes allowing a wider range of lenders to step into the market and offer them.

The FCA wanted RIO mortgages to be more widely available to older borrowers with a steady income, giving more options and providing an alternative to downsizing or using equity release.

RIO mortgages also have a simpler selling process and lenders need less advanced qualifications to sell them.

Now lenders are becoming increasingly flexible, offering a wider range of options, with some allowing borrowers to repay part of the capital as well (thereby leaving more of an inheritance to loved ones) and others offering set repayment dates.

The Scottish Building Society was among the first lenders to offer a RIO mortgage.

Paul Alexander, head of business development at the society says: “The move by the FCA to widen access to affordable borrowing for older people presents a real opportunity for intermediaries who previously missed out on this growing market if they were not qualified to provide advice on equity release products.

“Now all advisers can handle this business and can take comfort from the fact that we are already specialists in interest-only later life lending with many years of experience under our belt.”

Mr Alexander adds: “We treat everybody as an individual and are expecting high demand for our product, especially when older people become aware of the benefits.

"Where the applicants have a secure income and meet our affordability criteria, a Retirement Interest-Only mortgage may be a more suitable option than equity release.

“It provides an alternative to a house sale or expensive loan repayments and is good news for those nearing the end of a standard interest-only mortgage who have a shortfall in savings to repay the loan.