Can I use a RIO mortgage to buy a new home?

A Retirement Interest Only (RIO) mortgage is primarily designed for older homeowners (typically 55 or 60 and above) who need to borrow into retirement but do not wish to downsize immediately. While RIO mortgages are often used for remortgaging an existing property, they can also be used to facilitate the purchase of a new home, provided the borrower meets strict affordability criteria based on their retirement income.

Can I Use a RIO Mortgage to Buy a New Home? Understanding Later Life Lending Options

The short answer is yes, you can typically use a Retirement Interest Only (RIO) mortgage to purchase a new property, although the process and eligibility checks are distinct from standard residential mortgages. RIO products were introduced to bridge the gap between traditional mortgages, which often end around age 75, and equity release schemes, offering a flexible way for homeowners in or nearing retirement to manage their finances or move house.

Whether you are downsizing, moving closer to family, or buying a property that better suits your later life needs, a RIO mortgage provides a mechanism for secured borrowing where the capital loan amount is only repaid upon a specified life event, usually the death or permanent move into long-term care of the last surviving borrower.

What is a Retirement Interest Only (RIO) Mortgage?

A RIO mortgage is a long-term loan secured against your property, specifically tailored for older borrowers. It is similar to a standard interest-only mortgage in that you only pay the interest charges each month, not the capital sum. The crucial difference lies in the repayment mechanism and term limits:

• Interest Payments: You are required to make monthly payments to cover the interest accrued on the loan balance.
• No Fixed Term: Unlike standard mortgages, RIO loans do not have a set end date (such as 25 years). The loan continues indefinitely as long as you meet the interest payments.
• Capital Repayment Event: The loan principal is only repaid when a defined life event occurs, such as when the borrower dies or moves permanently into residential care. At this point, the property is typically sold to clear the debt.

Because RIO loans require ongoing monthly interest payments, lenders must adhere to stringent Financial Conduct Authority (FCA) rules regarding affordability, ensuring borrowers can manage payments throughout retirement.

Using a RIO for Property Purchase Versus Remortgaging

Many people associate RIO products with older homeowners looking to remortgage their current property to clear an existing debt or raise capital. However, using a RIO mortgage to buy a new home is a common and viable scenario, particularly if you are:

1. Downsizing and Need Extra Funds

If you sell your current, larger home and use the proceeds to purchase a smaller property, you may find yourself short of the required funds or wish to retain some capital for retirement income. A RIO mortgage can bridge this financial gap, allowing you to buy the new property without depleting all your liquid savings.

2. Upsizing or Right-Sizing

While less common, some retired individuals may need a larger property or one with specific features (e.g., ground-floor living space). If the sale of the previous property does not cover the cost of the desired new home, a RIO mortgage can provide the necessary financing, allowing you to buy a property that better suits your needs for the rest of your life.

3. Purchasing a Second or Buy-to-Let Property

It is important to note that RIO mortgages are almost exclusively secured against your primary residential property. They are not typically used to finance second homes or buy-to-let (BTL) investments, as the purpose is to provide affordable long-term interest-only borrowing secured against the property where you intend to live.

Eligibility and Affordability Criteria for RIO Mortgages

Using a RIO to purchase a new home requires meeting specific criteria set by the lender. These criteria are designed to ensure the product is suitable for later life and that the borrower can sustain the interest payments over potentially decades.

Age Restrictions

Most RIO lenders require applicants to be aged 55 or 60 and over. Crucially, if the application is joint, the age of the youngest borrower will be assessed against the lender’s maximum entry age criteria.

Affordability Assessment

This is the most critical element. Lenders must prove you can afford the monthly interest payments based on your guaranteed retirement income sources. This means demonstrating income from:

• State Pensions
• Private or Workplace Pensions
• Rental income (if allowable by the lender)
• Investment dividends or trusts

Lenders will stress-test this income to ensure you can afford payments even if interest rates rise significantly. Unlike standard mortgages, where affordability is based on current employment, RIO affordability focuses on the long-term sustainability of retirement income.

Loan-to-Value (LTV)

RIO mortgages usually have lower Loan-to-Value limits compared to standard residential mortgages, often capping the loan at 50% or 60% of the property’s value. This means you will need a significant deposit or equity stake from the sale of your previous property to purchase the new home.

Credit History Checks

Even though RIOs are aimed at older borrowers, a clean credit history is essential. Lenders will conduct a credit check to assess your financial reliability and history of meeting debt obligations.

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Risks and Considerations When Buying a New Home with RIO

While RIO mortgages offer flexibility, they are still a serious financial commitment. If you are considering using a RIO to purchase a new property, you must be aware of the associated risks:

• Interest Rate Changes: If you opt for a variable or tracker rate, your monthly interest payments could increase significantly, placing pressure on a fixed retirement income.
• Default Risk: Failing to make the required monthly interest payments constitutes a breach of the mortgage contract. Your property may be at risk if repayments are not made. Consequences of default can include legal action, increased interest rates, additional charges, and, ultimately, repossession of the property.
• Debt Remains: Unlike a standard repayment mortgage, the loan balance never decreases unless you make voluntary capital repayments. The full amount borrowed will eventually need to be repaid through the sale of the home, reducing the estate’s value left for beneficiaries.
• Sale Proceeds Risk: If the property value falls, the sale proceeds upon repayment may only cover the mortgage debt and associated fees, leaving less for the estate.

Comparing RIO with Other Later Life Options

When buying a new home in retirement, it is essential to compare the RIO with other common later life financial products:

RIO vs. Equity Release (Lifetime Mortgages)

While both are tailored for older homeowners, they operate differently regarding payments and debt accrual:

• RIO: Requires monthly interest payments. The debt level remains constant (assuming all interest is paid).
• Equity Release (Lifetime Mortgage): Typically requires no monthly payments. The interest rolls up and is compounded onto the loan balance, meaning the debt grows over time. This reduces the eventual equity remaining in the property.

If you have sufficient income to manage monthly payments, a RIO can be more cost-effective over the long term, as the compounding interest effect of Equity Release is avoided. For comprehensive, impartial guidance on different types of later life borrowing, the government-backed MoneyHelper service provides excellent resources.

The decision to use a RIO mortgage, especially for a new property purchase, should be made with specialist financial advice, ensuring you fully understand the long-term impact on your financial security and estate planning.

People also asked

Can I get a RIO mortgage if I have existing debt?

Yes, you can, but the affordability assessment will factor in all existing debt obligations (e.g., credit cards, outstanding loans). Lenders must be satisfied that your retirement income can cover both the RIO interest payments and your other commitments, which may reduce the maximum amount you can borrow.

What happens to the RIO mortgage when one joint borrower dies?

If the RIO mortgage is held jointly, the loan typically continues with the surviving borrower, provided they can continue meeting the monthly interest payments. The capital repayment event (when the loan must be cleared) is only triggered upon the death or permanent move into care of the last surviving borrower.

Is there an upper age limit for a RIO mortgage?

While the entry age is usually 55 or 60+, RIO mortgages generally have no fixed exit age, which is one of their main attractions. The loan term is designed to last the rest of the borrower’s life, provided interest payments are maintained.

Do I need a deposit if I am using a RIO to buy a new home?

Yes, you almost always need a significant deposit, or equity stake, when purchasing a new home with a RIO mortgage. Because RIO LTV limits are typically lower (often 50-60%), the amount you borrow will not cover the full purchase price, meaning the remainder must come from your funds (e.g., savings or the proceeds from selling your previous property).

Are RIO mortgages regulated?

Yes, RIO mortgages are regulated by the Financial Conduct Authority (FCA) in the UK. This ensures that lenders conduct rigorous affordability checks and that the products are sold appropriately to consumers, protecting older borrowers from taking on unsustainable debt.

Conclusion: Planning Your New Home Purchase in Retirement

A RIO mortgage is a powerful tool allowing older UK homeowners the flexibility to buy a new property that meets their evolving needs without the immediate requirement to repay the capital. By separating the interest payments from the principal, it offers lower monthly costs than a standard repayment mortgage.

However, securing a RIO to buy a new home demands detailed planning, especially around future income stability. Always seek advice from a qualified mortgage advisor specialising in later life lending to ensure the product is suitable for your circumstances and that you have robust plans in place to manage the required monthly interest payments indefinitely.