Mortgage lenders are responding to the demand for new solutions in what’s called the “later life lending market.” It’s a relief for older home-owners who’ve been paying their low-cost mortgages for 25 years – and now find they don’t own their own homes.
Borrowers who took out interest-only mortgages in the early 90s are finding that they’re coming to the end of their mortgages and are now being required to repay hundreds of thousands of pounds they haven’t got – because they’ve only been paying monthly interest on their home loans, not repaying the capital: the original cost of their homes.
Because of their age – many of these borrowers are now retired – they haven’t been eligible to re-mortgage, and their only option has been to sell up and move out.
It looked like a good idea at the time
Thirty years ago, interest-only mortgages looked like a great deal. Monthly repayments were low, and a booming property market gave borrowers confidence that they’d always be able to repay their mortgage when they sold – and have cash left over.
By 1998, 97% of first-time buyers were choosing interest-only mortgages.
But by the time of the financial crash of 2008 the shortcomings of the interest-only option were painfully apparent. People selling their houses were finding they were worth less than when they bought them.
Not having paid off any of the equity of their mortgages, many borrowers were finding they actually owed their mortgage lender money for the privilege of no longer living in their home.
Lenders got nervous and tightened up their criteria for interest-only mortgages: only a certain percentage of your mortgage could be interest-only.
Going to RIO for your mortgage
But interest-only is the only solution for older borrowers who no longer have salaries, and can’t afford capital-repayment mortgages.
At the beginning of 2018 the Financial Conduct Authority (FCA) relaxed the rules to help older borrowers who were facing losing their homes.
They redefined Retirement Interest-Only (RIO) mortgages as standard mortgages, and opened the door to building societies and other lenders to develop new mortgage products that would help older borrowers out of this end-of-term cash hole.
How do the RIOs work?
- There is no defined end date on most of these mortgages – you just keep making monthly interest payments until you sell your house (and possibly move into a retirement home), or you die (and your estate sells your house).
- Your loan-to-value (LTV) ratio on your house needs to be below a certain threshold so the mortgage lender is assured they’ll get their money back when the house is sold.
- If you can pay off any of the capital, you will be encouraged to do so: up to 10% per year.
- For a couple, you need to consider carefully what will happen if either of you dies: will you still be able to keep up the payments?
What are the pros and cons?
- There’s no final repayment date, which takes the pressure off you
- You keep your monthly payments affordable because you can still be only paying interest
- The amount you owe will eventually diminish in value due to inflation
- You can change to a repayment mortgage if circumstances change and you can afford it
- The interest rate you’ll be paying will be higher than for a standard mortgage
- If you live to a ripe old age and stay in your house paying interest every month, this type of mortgage could end up costing more than a standard mortgage for a set term
- The capital still needs to be repaid when the house is sold
Will I be eligible for a new interest-free mortgage?
- If you have 60% LTV you’ll be able to find an interest-only option
- With an LTV of around 75% you’ll be looking at a tailored option of repayment and interest.
- Minimum age to qualify starts at 55, with some lenders specifying 60 or 65.
- Maximum ages range from 80 to 99.
Who offer RIO mortgages?
Currently there are half a dozen or so lenders that have launched RIO mortgages including Post Office, Leeds Building Society and Nationwide.