What fees should I expect with a Retirement Interest Only mortgage?

A Retirement Interest Only (RIO) mortgage is designed for homeowners typically aged 55 or over, allowing them to release equity or remortgage their existing property while only paying the interest portion of the loan monthly. The capital is then repaid when a specified life event occurs, such as the borrower moving into long-term care or passing away. While RIO mortgages offer financial flexibility in later life, they come with a range of associated costs. Understanding these fees upfront is essential for accurate budgeting and ensuring the long-term affordability of the product.

Understanding What Fees Should I Expect with a Retirement Interest Only Mortgage?

When securing a Retirement Interest Only mortgage, you will encounter several types of charges. These can broadly be categorised into initial setup costs, ongoing professional fees, and charges applicable at the time of repayment or termination.

Initial Setup Fees: Costs Paid to the Lender

These are the core charges levied by the lender to set up and administer the RIO mortgage product. The amount varies significantly depending on the lender and the specific product chosen.

1. Arrangement or Product Fee

The arrangement fee (sometimes called a product fee or reservation fee) covers the administrative costs associated with providing the mortgage. This is often the largest single fee component.

• How it’s charged: It can be a fixed monetary amount (e.g., £999 or £1,495) or a percentage of the total loan amount (e.g., 0.5% or 1%).
• Payment options: You typically have the option to pay this fee upfront when the mortgage is completed, or you may be able to add it to the loan balance. While adding it to the balance saves immediate cash flow, remember that interest will be charged on the fee for the life of the loan.

2. Valuation Fee

Lenders require a professional valuation of the property to determine its current market value and ensure it provides adequate security for the loan. This fee covers the cost of sending an independent surveyor to assess your home.

• Variability: The cost is dependent on the property’s value and location. Larger or higher-value properties typically incur higher valuation fees.
• RIO specific considerations: While some lenders offer free basic valuations, especially on standard mortgages, RIO products may sometimes require more detailed surveys, depending on the age and type of the property.

3. Legal and Conveyancing Fees

Because an RIO mortgage involves changing the legal charge against your property, solicitors (conveyancers) must be instructed to handle the necessary legal paperwork. This ensures the lender’s security is properly registered, and all contractual terms are met.

• Standard fees: These cover checks like land registry fees, solicitor’s time, and obtaining searches.
• Independent legal advice: RIO lenders often insist that borrowers seek independent legal advice (ILA) before completing the contract, as it is a long-term financial commitment. The cost of this advice must be factored into your total budget.

Professional and Advisory Costs

In the UK, RIO mortgages are complex products, and regulatory bodies typically require borrowers to seek professional advice before proceeding.

4. Mortgage Broker or Advisor Fee

If you use a mortgage broker or financial advisor to help you find and arrange the RIO product, they will charge a fee for their services.

• Fee structure: This can be paid directly by you (a fixed fee or a percentage of the loan) or paid by the lender to the broker (a procuration fee). Often, brokers charge a combination of both.
• Value of advice: Using a specialist RIO advisor is highly recommended, as they can navigate the market to find products tailored to your age and income criteria. The fee for this expert advice is usually a worthwhile investment.

5. Credit Check and Application Fees

Before offering an RIO mortgage, the lender must perform rigorous affordability checks, including reviewing your credit history, to ensure you can comfortably afford the monthly interest payments.

While the lender does not usually charge a fee for the initial credit check, understanding your credit profile beforehand is crucial. 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)

Back-End and Exit Charges

These fees apply later in the mortgage term, typically when the loan is repaid or if you choose to switch products early.

6. Early Repayment Charges (ERCs)

Early Repayment Charges are penalties applied if you repay a significant portion or all of the loan capital before the end of the fixed or introductory period. These are typically charged if you decide to switch lenders, sell the property, or pay off the RIO mortgage early.

• Structure: ERCs are usually tiered, starting high (e.g., 5% in year one) and decreasing annually over the initial fixed rate period (e.g., 5-3-1%).
• Portability: Some RIO products are “portable,” meaning if you move house, you may be able to transfer the mortgage to a new property without incurring an ERC. However, this is subject to the new property meeting the lender’s criteria.

7. Exit or Redemption Fee

When the RIO mortgage is finally repaid (i.e., when the property is sold after the capital repayment event), a small administrative charge, known as an exit or redemption fee, may be applied. This covers the lender’s costs for formally removing the charge from the property title.

Historically, exit fees were standard, but they are now often absorbed into the arrangement fee or capped by consumer regulations, but you should always check the Key Facts Illustration (KFI) document for confirmation.

Compliance and Affordability: The Critical Risk

The main difference between an RIO mortgage and standard Equity Release is that with an RIO, you must demonstrate and maintain the ability to pay the interest monthly. Failure to make these payments will result in a default on the mortgage agreement. MoneyHelper provides impartial guidance on how affordability is assessed.

It is vital to understand the implications of non-payment:

• Default Consequences: If you fail to pay the agreed monthly interest, the lender may take legal action.
• Repossession Risk: Your property may be at risk if repayments are not made. This is the ultimate security the lender holds. While RIO lenders are regulated and must follow strict procedures, persistent non-payment can lead to repossession proceedings.

Comparing the Total Cost of Credit

When comparing RIO products, do not focus solely on the interest rate. It is crucial to look at the Total Cost of Credit, which includes all fees added to the loan and the interest charged on those fees over time.

Ask your advisor to provide a clear breakdown of the Annual Percentage Rate of Change (APRC), as this metric gives the most accurate reflection of the true cost of borrowing, incorporating both the interest rate and the cumulative effect of the fees.

People also asked

Can I add the RIO mortgage fees to the loan?

Yes, many RIO lenders allow initial costs, such as the arrangement fee, to be added to the principal loan amount. While this reduces the upfront cash requirement, remember that you will be charged interest on those fees throughout the life of the mortgage, increasing the total amount eventually repaid.

Are RIO mortgage fees tax-deductible?

For UK residential mortgages, including RIO mortgages, the interest paid and the associated fees are generally not tax-deductible. Tax implications are complex, however, and if you are using the property for business purposes or have a buy-to-let RIO (which is less common), specific rules may apply, and you should seek advice from a qualified tax professional.

How do RIO fees compare to Equity Release fees?

RIO mortgage fees often look similar to standard residential mortgage fees, focusing on valuation, arrangement, and legal costs. Equity Release (Lifetime Mortgage) products, conversely, often have higher advisory and valuation costs due to the specialist nature of the contract and the requirement for robust financial advice, but may sometimes waive product fees as they earn more from the rolled-up interest.

Is there a difference in fees if I choose a fixed-rate RIO versus a variable rate?

Yes, fixed-rate RIO products typically come with higher arrangement fees than variable-rate products. Lenders charge a premium (via a fee or a slightly higher rate) for the security and budgeting certainty provided by fixing the interest rate for a set period.

What happens to the fees if my RIO application is declined?

If your application is declined, you will generally only be liable for costs already incurred. This usually includes the valuation fee (if the survey has been carried out) and any non-refundable application fee. Arrangement fees are typically only payable upon successful completion of the mortgage.

Final Considerations for RIO Mortgage Fees

When assessing an RIO mortgage offer, always ask for a clear breakdown of all charges. The fees you pay can significantly impact the overall cost and the affordability of your monthly interest payments.

Transparency is key. Ensure your chosen advisor provides you with the following critical details in writing:

• The total amount of fees payable upfront.
• The total amount of fees that will be added to the loan capital.
• The full list of potential exit fees or Early Repayment Charges (ERCs) applicable during the introductory period.

By conducting thorough due diligence on all associated costs, you can ensure the Retirement Interest Only mortgage remains a sustainable and helpful solution for your retirement finances.