Homeowners planning on taking out new retirement interest-only (RIO) loans face a shocking cost hike for the privilege of continuing to delay the repayment of their capital balance, according to analysis by Royal London.
Anyone who has not saved up enough to repay the capital owed at the end of their interest-only mortgage term could face having to sell up and downsize or in the worst cases, be repossessed by their lenders.
Retirement interest-only loans are billed as one possible solution, allowing homeowners to continue to borrow on an interest-only basis into their retirements and to stay in their current homes.
There are around 550,000 interest-only borrowers approaching retirement in the UK, according to UK Finance.
However the average rate of interest on a ‘RIO’ loan, at 3.62 per cent* is roughly double the rate available on the mainstream mortgage market, where a typical best-buy mortgage rate is currently 1.65 per cent.
On an average interest-only loan size of £66,000, payments at 3.62 per cent would be £199 a month – more than double the £91 someone on a typical two-year fixed rate of 1.65 per cent would pay monthly.
Becky O’Connor, personal finance specialist at Royal London, said: “Homeowners who have the dreadful deadline of the end of their mortgage term looming with a capital balance still to repay may now look towards new RIO loans for salvation.
“However, there is a rate premium for the privilege of continuing to borrow on an interest-only basis and it could cost you double your current monthly interest-only payments. For many borrowers, this kind of cost hike, coming at a time of reduced income, will be hard to manage. Such a potential cost hike is a reason not to assume these loans will be a good option for homeowners considering them in retirement.”
Notes to Editors
The median rate on a retirement interest-only loan is 3.62 per cent, according to a data request by Royal London, the mutual insurer, to the Financial Conduct Authority.
Retired borrowers who apply for new retirement interest-only loans are taking out loans for £66,000 on average, according to a previous Freedom of Information request by Royal London.
The best RIO loan rate currently advertised is 2.59 per cent from Penrith Building Society, which would give repayments of £142 a month.
About Royal London:
Royal London is the largest mutual life insurance, pensions and investment company in the UK, with assets under management of £139 billion, 8.6 million policies in force and 4,348 employees. Figures quoted are as at 30 June 2020.