What if I want to downsize after taking out a Retirement Interest Only mortgage?

Planning to move home during retirement can be an exciting prospect, especially if you are looking to downsize to a property that better suits your needs and lifestyle. However, if you currently have a Retirement Interest Only (RIO) mortgage, understanding how this arrangement affects your move is crucial. RIO mortgages differ significantly from standard residential mortgages and equity release products, particularly regarding repayment triggers and portability.

What If I Want to Downsize After Taking Out a Retirement Interest Only Mortgage?

When you take out a RIO mortgage, the capital debt remains outstanding until a specific life event occurs, typically the death of the last borrower or their move into long-term care. Unlike a traditional mortgage, these products are not typically repaid over a fixed term. However, selling the property effectively triggers the requirement to settle the outstanding debt, regardless of whether a life event has occurred or not.

The good news is that downsizing is generally possible, but it requires careful planning regarding two main financial implications: settling the existing debt and dealing with potential Early Repayment Charges (ERCs).

The Two Primary Options for Settling Your RIO Debt

When you sell the property securing your RIO mortgage, you have two primary methods for managing the outstanding loan:

Option 1: Repaying the RIO in Full

The simplest and most straightforward route is to use the funds generated from the sale of your current property to pay off the RIO mortgage completely. If the sale proceeds exceed the outstanding loan balance, the surplus funds are yours to use, typically towards purchasing the new, smaller property. Because RIO mortgages only require you to service the interest monthly, repaying the capital means you start your new chapter debt-free (unless you take out a new mortgage).

Understanding Early Repayment Charges (ERCs)

A key consideration when repaying the RIO early is the possibility of incurring Early Repayment Charges (ERCs). Most mortgage products, including RIOs, have an initial fixed-rate period (e.g., five years) where the lender imposes a penalty if the loan is repaid before the end of that defined term. These charges can be significant, often calculated as a percentage of the outstanding debt.

• Check your offer documents: Review your original mortgage offer or contact your lender to determine if you are still within an ERC period.
• Weigh the costs: Compare the cost of the ERC against the savings gained by moving to a cheaper property or securing a more favourable deal elsewhere.

If you are nearing the end of your fixed-rate period, it may be financially beneficial to delay the downsizing move until the ERC period has expired.

Option 2: Porting Your RIO Mortgage

Porting refers to transferring your existing mortgage product, including the current interest rate and terms, from your old property to your new one. Not all RIO products are portable, so this must be confirmed with your current lender.

The Porting Process and Lender Criteria

Even if your RIO mortgage allows porting, the transfer is not automatic. The lender will need to assess the new property and potentially reassess your financial situation:

1. Property Assessment: The new property must meet the lender’s security requirements, including acceptable valuation, type, and location.
2. Affordability Reassessment: Although RIO mortgages require interest payments only, the lender will still need to confirm that you can afford the interest payments comfortably in your new home.
3. Loan Value: If the new property is significantly cheaper, the lender may require you to reduce the size of the loan, using the surplus funds from the sale to pay down the capital debt.
4. Lender Approval: If you plan to borrow more than the original RIO balance (e.g., if the new home is slightly more expensive), the additional borrowing will be subject to a new underwriting process, potentially with different interest rates and terms.

Porting can be advantageous as it allows you to retain your current interest rate and avoid ERCs on the portion of the loan that is transferred.

Financial Implications of Downsizing

Downsizing generally results in a financial windfall, but you must factor in all costs associated with the move.

Handling Surplus Funds

If your new property costs less than the proceeds remaining after clearing the RIO debt (or the reduced porting balance), the remaining money is yours. This capital can be used to boost retirement income, pay for home improvements, or held in savings.

Managing a Shortfall

If, perhaps unexpectedly, the cost of the new property (plus stamp duty, legal fees, and moving costs) exceeds the funds remaining after settling the RIO, you will face a shortfall. Options to cover this include:

• Using existing savings or investments.
• Applying for a new, larger RIO or a Lifetime Mortgage on the new property (subject to lender criteria).

Understanding the full cost of moving is vital. This includes solicitors’ fees, valuation fees, and Stamp Duty Land Tax (SDLT), even if moving to a smaller home. For comprehensive guidance on preparing for retirement and financial planning, the Government’s MoneyHelper website is a useful resource.

Credit Checks and Applications

Whether you are porting the RIO or applying for a new mortgage on the new property, your lender will perform credit checks to confirm your financial health and ability to meet the monthly interest payments. Before making any formal applications, it is helpful to know where you stand financially.

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Seeking Professional Advice

Navigating the logistics of selling a mortgaged property and buying a new one in retirement can be complicated, especially with ERC implications and porting criteria. Consulting a qualified independent financial adviser or mortgage broker who specialises in retirement lending is highly recommended. They can review your existing RIO contract, assess the implications of downsizing, and guide you toward the most financially efficient solution for your specific circumstances.

People also asked

Is my RIO mortgage automatically transferable to a new property?

No, RIO mortgages are not automatically transferable. You must apply to your existing lender to ‘port’ the product, and this is subject to their formal approval, valuation of the new property, and confirmation that you still meet their current eligibility and affordability criteria.

What happens if the new property is much cheaper than the one I am selling?

If the new property costs significantly less, your lender will generally require you to reduce the outstanding RIO loan balance using the surplus funds generated from the sale. Any remaining funds after the required reduction will be released to you.

Will I incur penalties if I sell my home and pay off the RIO mortgage?

You will likely incur Early Repayment Charges (ERCs) if you sell your property and pay off the RIO balance during an initial fixed-rate or introductory period specified in your original mortgage agreement. It is essential to check your contractual terms to determine if an ERC is applicable.

Do I have to take out a new RIO mortgage on the property I downsize to?

No, you do not have to. If the proceeds from the sale of your current home are sufficient to cover the purchase price of the new, smaller property after settling the outstanding RIO debt, you may choose to buy the new property outright, thereby ending your mortgage obligations entirely.

How long does the RIO mortgage porting process usually take?

The porting process timeframe is similar to a standard remortgage application, often taking several weeks to a few months, depending on the complexity of the property chain, the lender’s processing speed, and the efficiency of the property solicitors.

Can I increase the loan size if I port my RIO mortgage to a slightly more expensive home?

Yes, you can apply to increase the size of the loan; however, this will be treated as a new application for the additional borrowing. The lender will conduct a new affordability assessment to ensure you can manage the increased monthly interest payments, and the new portion may be offered at different rates and terms.

Final Considerations for Your Downsize

Downsizing can provide significant financial relief in retirement, often releasing tax-free capital. If you hold a Retirement Interest Only mortgage, your focus should be on securing a beneficial outcome that minimises charges while ensuring the long-term affordability of your interest payments in your new home. By thoroughly investigating your porting options and calculating potential ERCs, you can make a clear, informed decision about your next step.