Can legal fees be included in a Retirement Interest Only mortgage?

A Retirement Interest Only (RIO) mortgage is a specific type of later-life lending that allows homeowners, typically aged 55 or over, to borrow funds secured against their property. Understanding the total cost of taking out a RIO mortgage, including whether necessary associated costs like legal fees can be included in the loan amount, is crucial for financial planning.

Can Legal Fees Be Included in a Retirement Interest Only Mortgage?

When you take out a Retirement Interest Only (RIO) mortgage, you are securing a loan against your property. Unlike standard mortgages which require both capital and interest repayments, RIO mortgages require only monthly interest payments, with the capital debt deferred until a specified life event occurs (typically the death or permanent move into care of the last surviving borrower).

The total amount a lender is willing to advance is governed by affordability checks, the property valuation, and your age. Within that total borrowing limit, most lenders allow various associated costs to be bundled into the main loan amount. This process is known as capitalisation.

What Fees Are Involved in a RIO Application?

Applying for a RIO mortgage involves several professional and administrative stages, each typically incurring a fee. These fees must be accounted for, whether they are paid upfront by the borrower or added to the loan.

Typical fees associated with a RIO mortgage include:

• Arrangement/Lender Fees: An upfront charge by the provider for setting up the mortgage.
• Valuation Fees: Costs associated with having a surveyor assess the property’s worth.
• Advisory/Broker Fees: Fees paid to a financial adviser or broker for finding and recommending the appropriate product.
• Legal Fees (Conveyancing): Charges for the necessary legal work to secure the mortgage against the property.

The Distinction Between Lender and Borrower Legal Fees

This is often the core of the confusion regarding legal fees. When processing a RIO or any regulated mortgage product, two sets of legal representation are typically involved:

1. Lender’s Legal Fees (Often Capitalised)

These are the costs incurred by the lender for their legal team to draw up the necessary contracts, perform due diligence, and register the charge on the property with HM Land Registry. Although these costs are generated by the lender, they are often passed on to the borrower as part of the overall setup costs.

In most RIO mortgage cases, if the lender charges a set legal fee or contribution, this amount can typically be included (capitalised) into the final loan balance, provided the total loan remains within the lender’s maximum loan-to-value (LTV) limits.

2. Borrower’s Independent Solicitor Fees (Often Paid Upfront)

As RIO mortgages fall under the category of later-life lending, which shares regulatory features with equity release, borrowers are required to seek independent legal advice. This is to ensure you fully understand the implications of securing debt against your home, especially debt that lasts for the rest of your life.

The fees charged by your chosen independent solicitor for providing this advice and conducting the conveyancing on your behalf are usually required to be paid by you directly and upfront. While some specialist RIO products may offer a cashback upon completion to help cover these costs, relying on your lender to include these independent fees in the capitalised sum is less common than including the lender’s own administrative fees.

How Capitalisation Impacts the Total Cost

If you choose to have fees capitalised—meaning they are added to the principal loan amount—you reduce your immediate out-of-pocket costs. However, it is essential to understand the financial implications of this choice:

When fees are capitalised, they become part of the debt secured against your property. This means you will pay interest on the fee amount for the entire duration of the loan. Over many years, capitalising even relatively small amounts can significantly increase the total interest paid.

• Example: If you capitalise £2,000 in fees at a 5% interest rate, and the mortgage lasts for 20 years, you are paying interest on that £2,000 for 20 years.

Therefore, while including fees makes the initial transaction smoother, paying fees upfront with savings, if possible, is generally more cost-effective in the long run.

For detailed, impartial guidance on later life mortgage costs and requirements, you can visit the MoneyHelper website.

Regulatory Requirements and Affordability Checks

Unlike traditional Equity Release products where interest can be rolled up, the key compliance feature of a RIO mortgage is that the borrower must prove they can afford the monthly interest payments for the duration of the loan. This means lenders conduct strict affordability assessments.

The decision on whether they allow fees to be capitalised often hinges on whether adding that extra sum to the total borrowing amount impacts your ability to pass the affordability check for the interest payments.

Lenders will review:

• Your current income (pensions, investments, employment income, if applicable).
• A detailed budget of your existing expenditure.
• How they stress-test the loan, ensuring you can still afford the payments even if interest rates were to rise.

If capitalising the fees pushes the total loan amount higher, it increases the required monthly interest payment. If that increased payment breaches the maximum sustainable amount determined during the assessment, the lender may insist that those fees are paid upfront.

Risks and Considerations for RIO Mortgages

While RIO mortgages offer a valuable solution for those seeking to release equity or manage debt in retirement without immediate capital repayment, they still carry risks that must be carefully considered:

Interest Rate Risk

RIO mortgages usually operate on variable or fixed interest rates for an introductory period, followed by a move to a variable rate. Changes in the Bank of England base rate can directly affect your monthly payments, potentially straining your retirement income.

Affordability Failure

The paramount requirement is the ability to maintain monthly interest payments. If circumstances change—for example, a reduction in retirement income or unexpected increase in living costs—you may struggle to meet these payments.

Failure to meet the required monthly payments means you are in breach of the mortgage agreement. Your property may be at risk if repayments are not made. Consequences can include legal action, additional charges, increased interest rates, and, ultimately, repossession of the property as a last resort.

People also asked

Can I use a RIO mortgage to pay off existing debts?

Yes, many people use the funds released by a Retirement Interest Only mortgage to repay existing debts, such as outstanding standard mortgages, credit cards, or personal loans. However, the primary purpose must be clearly stated during the application, and the maximum loan amount will still depend on affordability and property value.

Are RIO mortgages regulated?

Yes, Retirement Interest Only mortgages are regulated by the Financial Conduct Authority (FCA). This regulation ensures that lenders adhere to strict consumer protection standards, including mandatory advice and rigorous affordability checks before the product can be offered.

Do I need an independent solicitor for a RIO mortgage?

Yes, seeking independent legal advice is strongly recommended, and often mandatory, particularly given the long-term commitment of a RIO mortgage and its nature as debt secured against your primary residence. An independent solicitor ensures your interests are protected throughout the legal process.

Is there an age limit for a Retirement Interest Only mortgage?

While there is generally a minimum age requirement (often 55 or 60), there is typically no defined upper age limit to apply for a RIO mortgage. Eligibility is based more heavily on the value of the property, the borrower’s health (in some cases), and critically, their proven ability to afford the monthly interest payments.

What happens if I stop paying interest on a RIO mortgage?

If you fail to meet the interest payments, the lender will follow standard arrears procedures. As the mortgage is secured against your home, repeated failure to pay could eventually lead to the lender taking legal action, which may result in repossession of the property, as explained in your mortgage agreement.

In summary, while the specific rules governing capitalisation of legal fees vary significantly between different RIO providers, it is common practice to allow the inclusion of lender-associated administration and legal costs within the total loan amount. However, you should budget to pay your own independent legal advisor upfront, and always assess the long-term cost implication of increasing the overall principal through capitalisation.