A good alternative to equity release

Old lady playing an electric guitar © Getty Images
An RIO gives you more money to play with

Retirement interest-only mortgages could be a better way to access funds than equity-release products.

It has been 12 months since retirement interest-only mortgages went mainstream. These mortgages can be a good alternative to equity release for older borrowers, but they have previously received little publicity, with lenders slow to make products available.

An retirement interest-only mortgage differs from a standard interest-only mortgage in that there isn’t a set end date for the loan. It only has to be repaid when you sell your property, die or go into long-term care. The affordability calculations also only look at whether you can afford to repay the interest on the loan, not the capital, as that will be paid back when the property is sold.

Many people are not aware of retirement interest-only (RIO) mortgages as in the past they have been lumped in with equity release products. However, last year, the Financial Conduct Authority – the City regulator – reclassified RIO mortgages as standard mortgages, so that mainstream lenders could start offering them.

It was a good move as retirement interest-only mortgages are quite different to equity release. With the latter, you take out a lifetime mortgage on your home. You don’t have to repay the loan until you die or the house is sold, and importantly, you also don’t have to make monthly interest repayments. Sounds great, but in reality, this comes with a massive sting in the tail. Because you aren’t making any repayments, the interest is rolled up and added to the amount that the equity release firm takes when your home is eventually sold. That interest quickly mounts up. For example, a £100,000 equity release loan at 5% interest would mean you owed £211,370 after 15 years, assuming interest is compounded monthly.

By contrast, with an RIO mortgage, you repay the interest every month, so it never compounds. On the above loan, you would repay £416 a month and after 15 years still owe the initial £100,000. In total you would have paid £74,880 in interest repayments, far less than would be owed with equity release.

The drawback to RIO mortgages is the interest rate. While they are competitive against equity-release products, standard mortgages are far cheaper. For example, Leeds Building Society has launched a ten-year fixed rate ROI at 3.99%. TSB has a standard ten-year fix at 2.29%, but it won’t lend beyond your 75th birthday. So, you may want to leave the RIO mortgage until standard mortgages are no longer an option.


Dying is expensive

The government is pickpocketing the dead again. The cost of a death certificate has nearly trebled this month, rising from £4 to £11 per certificate. Though it doesn’t seem like much, families often need up to 20 certificates to prove death to different authorities, and would have to pay £200 rather than £80 for the privilege of proving a death has occurred.

“This all adds to the cost of death and it prolongs the misery of people going through the most difficult times of their lives,” says Liberal Democrat leader Sir Vince Cable in the Daily Mail. “There is no justification for almost tripling the costs of death certificates.”The increase comes just weeks after probate fees were put up, with some estates now having to pay almost £6,000 to get probate granted (though the smallest estates now pay nothing).

The government has defended the increase in certificate fees as it is the first since 2010. However, there are still no plans to increase the inheritance tax (IHT) threshold, which has been frozen at £325,000 since April 2009 (although the government is phasing in £175,000 of relief on passing on main residences). Over the past decade, tax receipts from IHT have risen by an average 10% each year.