Are You Short of Money In Retirement But Living In Your Biggest Asset?

Once you've retired, your income is largely fixed, while the weekly shop, the energy bill and the car insurance keep going up. If your home is the biggest thing you own, you may have wondered whether you could use some of its value.

The trouble is that for most of your working life, the aim was to pay off the mortgage. So the idea of borrowing against your home again can feel like going backwards, and even a little frightening. And if you've looked into equity release, you may not have liked what you found.

Equity release isn't the only option. A retirement interest-only mortgage, or RIO, is another way to borrow against your home later in life. It isn't right for everyone, but it's worth understanding how it works before you rule it out.

What puts people off equity release?

The most common form of equity release is a lifetime mortgage. You borrow against your home, and with most plans you make no monthly payments. Instead, the lender adds the interest to the loan, then charges interest on that interest. So you owe more every year, and the longer the loan runs, the faster that happens. To give you an idea, at an interest rate of 6%, what you owe would roughly double in 12 years and more than treble in 20. That can take a large share of what you'd hoped to leave your family.

That's a fair worry, and it's one I hear often. Ginkgo isn't authorised to give advice on equity release, so I won't go into it in detail here. A RIO avoids that worry, because you pay the interest as you go.

What is a retirement interest-only mortgage?

A RIO is a mortgage designed for older borrowers. You borrow a sum against your home and pay only the interest each month. Because you pay the interest as you go, the amount you owe stays the same for as long as the loan runs.

You don't have to pay back the loan itself during your lifetime. It's repaid when the house is sold, usually after you die or move into long-term care. If you have it jointly, that's normally after the second of you dies or moves into care.

Most lenders offer RIOs from age 55, and some from 50. Many have no upper age limit, which matters, because an ordinary mortgage can be hard to get once you're past a certain age. Each lender sets its own rules on age, income and how much you can borrow, so the right one for you depends on your circumstances.

How is a RIO different from equity release?

The simplest way to see the difference is side by side.

Neither is right for everyone. Equity release has real advantages: there's no monthly payment to fall behind on, and plans that meet industry standards mean you can never owe more than your home is worth.

Who might a RIO suit?

There are two situations where a RIO tends to make the most sense.

The first is if you own your home outright and need a lump sum – for a new car, repairs to the house, or to help a child or grandchild – and your pension covers your monthly bills with enough left over to pay the interest. Because what you owe doesn't change, you also know exactly what will come off the value of your home when it's sold.

The second is if you took out an interest-only mortgage years ago and it's coming to an end with no way to repay it. You may be worried about having to sell. If you can show you can afford the interest, a RIO may let you keep paying the interest as you do now and stay in your home.

What does a RIO cost?

RIO rates are generally in line with ordinary interest-only mortgages, sometimes a little higher. They're usually lower than lifetime mortgage rates. As with any mortgage, you can choose a fixed rate or a variable one. A fixed rate means you know exactly what you'll pay for a set period. A variable rate means your payments could go up as well as down.

There are also costs to setting one up: a valuation, legal fees and advice fees. And you pay the interest every month for as long as the loan runs, which could be twenty years or more. When we look at whether a RIO is right for someone, that total cost over the years is taken into consideration, not just the monthly figure.

What are the downsides?

A RIO is still a mortgage, and it carries the same risks as any other. If you don't keep up the payments, you could lose your home. The lender will check that you can afford the interest from your retirement income, so you'll need to show your pension and any other income.

Not all pension income counts the same. Lenders prefer income you can rely on for life, such as the state pension, a final salary pension or an annuity. Money you draw from a pension pot may count for less, because the pot can run down. Sometimes part of a pot needs to be turned into a guaranteed income first.

If you take out a RIO with a partner, think about what would happen if one of you died. Your household income might fall – you could lose a state pension, or part of a private pension – but you'd still have the same monthly payment to make. Lenders usually check that whoever is left could still afford it.

A RIO is also less likely to suit you if you expect to move or need care in the next few years. You'd pay the costs of setting up a loan that wouldn't run for long, and there may be charges for repaying it early. And lenders will only let you borrow part of your home's value, so it won't work if you need most of it.

Borrowing against your home also means there will be less to pass on. And receiving a lump sum could affect any means-tested benefits you get.

Working together

From the mortgage point of view, my job is to find out whether you can borrow, how much, and which lender suits you. But a RIO is never just a mortgage decision. It affects your pension, your tax and what you leave your family, so our financial advisers and I work on it together from the start. You get one joined-up view of your money, not just a mortgage.

Borrowing in retirement is a big decision, and it should be on your terms. Take your time, ask every question you have, and don't let anyone rush you. Using the value of your home doesn't have to mean owing more every year.

Angela Robert, Mortgage and Protection Adviser, Ginkgo Financial