Retirement interest-only (RIO) mortgage borrowers could face a significant cost hike by delaying the repayment of their capital balance, according to analysis by Royal London.
The insurer says 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% is roughly double the rate available on the mainstream mortgage market, where a typical best-buy mortgage rate is currently 1.65%.
On an average interest-only loan size of £66,000, payments at 3.62% would be £199 a month – more than double the £91 someone on a typical two-year fixed rate of 1.65% would pay monthly.
Becky O’Connor, spokesperson 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.”