Are there exit fees for closing a RIO mortgage early?

Closing any mortgage product early, including a Retirement Interest-Only (RIO) mortgage, often involves specific costs detailed in your original agreement. While RIOs are designed for long-term stability, if you choose to repay the loan capital prematurely—either by remortgaging, selling the property, or moving to an alternative product—you may be subject to various charges, principally Early Repayment Charges (ERCs) and standard administration or exit fees.

Are there exit fees for closing a RIO mortgage early?

For most borrowers, the question are there exit fees for closing a RIO mortgage early? is answered by examining two key clauses within their original mortgage contract: the Early Repayment Charge (ERC) and the final administration or ‘deeds release’ fee.

The total cost of closing your RIO mortgage prematurely depends entirely on the terms you agreed upon when you first took out the loan, and critically, how long you have been paying it back. It is essential to understand that an exit fee is not necessarily a punitive charge but often a mechanism for the lender to recover the costs associated with the guaranteed interest rate they offered you during the fixed term.

Understanding the Retirement Interest-Only (RIO) Mortgage

A Retirement Interest-Only (RIO) mortgage is designed specifically for older borrowers, typically those aged 55 and over. Unlike standard interest-only mortgages where the term ends after 25 years and requires the capital to be repaid, the RIO mortgage term generally runs until a specified ‘life event’ occurs, such as the borrower’s death, moving into long-term care, or the property being sold.

During the life of the loan, the borrower only pays the interest accrued, meaning the original capital balance remains untouched. While RIOs offer security and stability in retirement, if circumstances change and you need to close the account before the life event occurs (for example, you decide to downsize or switch lenders), the standard rules governing early mortgage closure will apply.

The Two Main Categories of RIO Exit Fees

When closing your RIO mortgage, you will generally encounter two distinct categories of charge:

1. Early Repayment Charges (ERCs)

An Early Repayment Charge (ERC) is the most significant cost you may face if you choose to pay off your mortgage capital early. ERCs are almost exclusively associated with mortgages that have a fixed-rate period, such as a 2-year, 5-year, or 10-year fixed rate.

How ERCs work:

• Fixed-Rate Dependence: If you repay the capital during the fixed-rate term (e.g., if you took out a RIO with a 5-year fixed rate and close it after 3 years), the lender will charge an ERC.
• Percentage Calculation: ERCs are calculated as a percentage of the outstanding loan balance being repaid. This percentage typically reduces annually during the fixed-rate period.
• Typical Structure: A lender might charge 5% of the capital in year one, 4% in year two, 3% in year three, and so on. For a remaining balance of £100,000, a 3% ERC would cost £3,000.

If your RIO mortgage is currently on the lender’s Standard Variable Rate (SVR)—meaning the fixed period has already ended—you will generally not be liable for an ERC, giving you much greater flexibility to switch or repay the loan capital without incurring this significant fee.

2. Standard Administration and Exit Fees

Even if you avoid the ERC by waiting until your fixed term expires, you are still likely to face a standard administration or exit fee. These fees are much smaller and are designed to cover the administrative costs associated with closing the account, preparing final statements, and releasing the legal charge (or “deeds release”) against your property.

• Common Terminology: These fees may be called ‘Final Repayment Charges,’ ‘Deeds Release Fees,’ or ‘Mortgage Exit Administration Fees (MEAFs).’
• Typical Cost: These costs usually range from £50 to £300, depending on the lender and the complexity of the paperwork involved.

It is important to note that many modern lenders detail this administration fee in their initial Key Facts Illustration (KFI) and subsequent offer documents, ensuring transparency about the final closing cost, regardless of when the mortgage is settled.

The Impact of Portability on RIO Exit Fees

If you are closing your RIO because you are selling your current property but plan to buy a new one, your mortgage product may be ‘portable.’ Portability allows you to transfer the existing RIO mortgage, including the interest rate and the remaining fixed term, to the new property.

If the RIO mortgage is portable and you meet all the lender’s affordability criteria for the new property, you could potentially avoid the Early Repayment Charge entirely. However, if the new loan amount required is smaller than the outstanding balance, you may incur an ERC only on the portion of the debt you are paying off early.

Always speak to a qualified mortgage adviser before assuming your RIO is portable, as specific lender criteria must be met, especially regarding the new property’s valuation and your ongoing financial stability.

How to Identify and Minimise Your RIO Exit Costs

The most effective way to understand your liability for exit fees is to review your original mortgage offer document or contact your existing RIO lender directly. They are legally obliged to provide you with a current settlement statement, which details the exact outstanding balance and any applicable fees should you choose to redeem the loan on a specific date.

Practical Steps to Minimise Costs

1. Check the End Date of the Fixed Term: If you are within 3 to 6 months of the fixed term expiring, it is almost always financially beneficial to wait until the contract moves onto the SVR before closing the mortgage, thus avoiding the ERC entirely.
2. Check Your ERC Calculation: Confirm the exact percentage used for the ERC calculation. Ensure you verify if the lender allows annual overpayments (usually 10% of the capital) without penalty, as utilising this allowance could reduce the eventual fee.
3. Consult an Independent Adviser: A specialist mortgage broker can review your current RIO agreement and compare the cost of paying the ERC versus the savings available from switching to a new, potentially better deal. They can also ensure you meet the necessary affordability checks for any new product.

If you are struggling to understand complex mortgage terminology or charges, seeking impartial guidance is crucial. You can find free, impartial advice on managing your debts and understanding mortgage rules through government-backed services like MoneyHelper.

Compliance and Important Financial Considerations

While RIO mortgages offer a manageable payment structure during retirement, switching or closing them requires careful financial planning. If you are considering closing your RIO to take out a different type of borrowing, such as a different interest-only product or equity release, ensure you fully understand the new terms and the potential risks involved.

If you are considering a new mortgage application, lenders will conduct a thorough assessment of your finances. Checking your credit history is a prudent first step when preparing for any significant financial transaction. Get your free credit search here. It’s free for 30 days and costs £14.99 per month thereafter if you don’t cancel it. You can cancel at anytime. (Ad)

Remember that all mortgage debt carries risk. If you switch to a new product and repayments are not made, the consequences can be severe. Your property may be at risk if repayments are not made. This could lead to legal action, repossession, increased interest rates, and additional charges being levied against your account.

People also asked

Can I close my RIO mortgage without penalty after the fixed term ends?

Once the initial fixed-rate period expires and your RIO mortgage moves onto the lender’s Standard Variable Rate (SVR), you can typically redeem (close) the mortgage capital without incurring the major Early Repayment Charge (ERC). However, a small administration or exit fee usually remains payable.

Are RIO exit fees the same as equity release early exit fees?

No, RIO mortgages and equity release products (like Lifetime Mortgages) have fundamentally different fee structures. RIO mortgages use standard mortgage ERCs, whereas many Lifetime Mortgages use complex, often significant, gilt-based early repayment charges, which can be highly volatile.

How far in advance should I notify the lender I plan to close my RIO?

Lenders usually require a period of notice, often 28 days or one month, when you plan to redeem the mortgage. This allows them time to calculate the final settlement figure accurately, including any accrued daily interest up to the completion date.

What happens if I inherit a property with a RIO mortgage?

A RIO mortgage is designed to be repaid upon the death of the borrower(s). When the property is inherited, the executor of the estate must contact the lender, and the loan must typically be repaid through the sale of the property or refinancing, usually within 12 months, and no ERCs would apply at this stage.

Is the valuation fee an exit fee?

No. A valuation fee is paid at the start of a remortgage process to assess the property’s value for the new lender. It is an application cost for the new loan, not an exit fee levied by your existing RIO provider.

Navigating the costs associated with closing a Retirement Interest-Only mortgage requires meticulous attention to the original contractual details. While standard administrative charges are a certainty, the primary goal for most borrowers should be timing the exit to avoid the substantial financial burden of the Early Repayment Charge (ERC).