Before the financial crisis of the late noughties many lenders were offering “interest only” mortgages with no formal means of repayment. The borrower merely needed to cover interest each month and declare that their intention was to sell the property and repay the mortgage sometime in the future before the mortgage expired.

In reality, for many borrowers who wanted to remain in their properties, this was the only way they could afford the high purchase costs. Finding a suitable alternative property is not that easy and moving costs have gradually been increasing, especially with the many adjustments to stamp duty.

So an increasing number of borrowers, where their interest only mortgage terms are coming to an end, are facing an uncertain future as to how they can repay their mortgage debt.

As a result, we are now seeing mortgages with increases to the maximum allowable age, and even some mortgages with no maximum ages! In addition, and in order to keep monthly payments manageable, “interest only” payments have continued to be available and now, RIO – Retirement Interest Only mortgages: this is where the mortgage is ultimately repayable when the property is sold or upon death of the mortgagee.

Affordability is a key issue for RIO mortgages. Not just what can be afforded today, but what affordable level of repayment can be sustained in the longer term and potentially throughout retirement. This is especially important where there are joint borrowers – can a surviving partner continue making the required payments if their partner were to die?

Another matter to consider is that RIO mortgages leave clients with an exposure to interest rate risk – even if it is locked-in today for say 3 years, what interest rates might be upon expiry of the term are unknown. Those of us who have experienced 15%+ interest rates know how difficult this experience can be. For many older borrowers any interest rate increases could prove more difficult to sustain as their income may be largely fixed or reliant upon investment returns.

Some borrowers may, therefore, prefer the certainty of a lifetime mortgage where the interest rate is fixed for life or until the property is vacated if they enter long term care. These products require no income assessment and do not require any interest payments at all. However, some payments can be made without penalty, which can be useful to limit the negative effects of interest upon interest.

The good news though is the increasing options for mortgage borrowing in later life. Clients should carry out research on the options available and what might work for them and it is also important to consider appropriate professional advice.

Please contact our mortgage specialist to discuss your circumstances and to see if RIO or another mortgage could be suitable for you.
 

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