Retirement interest-only (RIO) mortgages are often popular with borrowers in their 50s or 60s who are looking to extend their mortgage into retirement and who might not be eligible for a standard interest-only mortgage.
When you take out a RIO mortgage, the amount you’re able to borrow is based on several factors, including your future retirement income. As interest-only repayments are relatively low when compared to mortgage payments where you are repaying both interest and some of the capital you’ve borrowed, it’s typically easier to prove they are affordable when you undergo the lender’s affordability assessment. But as a borrower approaching retirement, or who is already in retirement, the income sources that lenders accept for RIO mortgages differ from those they’ll look at when you’re applying for a standard mortgage.
Here, we explain which income sources you can use when you undergo an assessment for a retirement interest-only mortgage.
What are retirement interest-only (RIO) mortgages?
RIO mortgages are an innovative type of mortgage designed for borrowers aged 55 or over who may perhaps struggle to be accepted for a standard mortgage. Some lenders will allow you to apply from the age of 50.
They don’t come with age restrictions for when the debt must be repaid, and enable you to make interest-only mortgage payments until you pass away, or move into long-term care and the property is sold, at which point the mortgage capital must be repaid. You can read more about how they work in our article How retirement interest-only mortgages work.
Some RIO mortgages enable you to repay some capital as well as interest on your mortgage to reduce the size of your loan over time, leaving more of your property’s value available to be passed to your loved ones when you die.
How much can you borrow?
You’ll usually need a significant amount of equity in your property to qualify for a RIO mortgage, as you can typically borrow up to a maximum of around 50% or 55% of the value of your property on an interest-only basis. However, some lenders may be prepared to lend up to 75% of the property’s value.
Lenders usually set other qualifying criteria, too, such as a minimum property value, income and minimum loan size. The amount you can borrow, as with a standard mortgage, will ultimately be based on an affordability assessment that takes into account both your income and outgoings to ensure you can meet your monthly mortgage payments. The latter will include your current mortgage payments, along with any other regular debt repayments you may be currently making, such as personal loan or credit card payments.
What sources of income will RIO lenders accept?
As part of your affordability assessment, RIO mortgage lenders will look at your current income if you’re working, and will also consider your future income when you retire. Your income in retirement is a crucial part of your affordability assessment as a RIO mortgage doesn’t have a defined term and, as previously mentioned, the capital is usually only repaid once you die or go into long-term care.
This may include, for example, income from pensions, a buy to let property, savings interest, and/or dividends from shares that you hold. If you receive certain benefits such as disability benefit, for example, you’ll also be asked to provide details of how much income these provide. The form you complete when you apply for a RIO mortgage will detail all the different types of income lenders will take into account.
If you’re currently receiving income from pensions, you’ll be asked to provide full details, including any State Pension payments, drawdown pension income, and any income you receive from an annuity or final salary pension. If you are already retired, lenders will also want to check your private and company pension forecasts, as part of their affordability assessment criteria.
Of course, affordability criteria can vary from one lender to the next and having the right paperwork to back up your current and future income will be important. If you’re taking out a RIO mortgage jointly with someone else, their current and future retirement income sources will also be included as part of the assessment.
However, remember that you only have to prove that you can afford the interest payments on a RIO mortgage, rather than repayments that consist of both part of the capital and the interest at the same time. As repayments are generally relatively low, it should in theory be easier to prove they are affordable even if you don’t have a substantial pension income.
Where to get more help
A mortgage advisor can help you understand how much you could afford to borrow, apply for a RIO mortgage, and compare all of the different options to know which deals you are likely to be accepted for.
It’s not always easy to work out whether a RIO mortgage is right for you, or whether you might be better off with a different type of deal, so if you’re in any doubt, seek professional mortgage advice.
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