Retirement Interest-Only (RIO) mortgages are becoming an increasingly popular solution for older borrowers looking for flexible, manageable financial options in later life. With a RIO mortgage, you only pay the interest on the loan each month, and the full loan amount is repaid when the property is sold—usually when you move into long-term care or pass away.
For couples applying for a RIO mortgage together, the process is straightforward, but there are some important considerations, especially when it comes to affordability in the event that one applicant passes away. Let’s break down how joint RIO mortgages work, what happens to affordability if one partner dies, and how you can plan ahead to avoid future financial strain.
How Affordability is Assessed for Joint RIO Mortgages
When two people apply for a RIO mortgage together, the lender will assess the affordability of the loan based on both applicants’ incomes. This could include pensions, savings, or other sources of retirement income. Since RIO mortgages only require you to pay the interest on the loan each month (rather than repaying the principal), the monthly payments are typically lower than those of a standard mortgage.
For many couples, this makes RIO mortgages an attractive option, as they can access funds from their home equity while keeping their payments manageable. However, affordability checks are still essential to ensure that both applicants can comfortably make the interest payments.
Lenders will also factor in what might happen if one applicant passes away. This ensures that the remaining partner can continue to afford the payments, even if their household income decreases significantly.
What Happens if One Applicant Dies?
One of the most critical aspects of a joint RIO mortgage is ensuring that the surviving partner can still afford the payments if one partner dies. In most cases, the household income will decrease following the death of a partner, as one source of pension or retirement income may no longer be available.
For example, let’s say a couple has a combined annual income of £30,000 from pensions and other sources. Based on this, the lender assesses that they can afford the monthly interest payments on a RIO mortgage. However, if one partner dies and the surviving partner’s income drops to £15,000, the lender would have already considered this scenario at the time of application. The affordability checks ensure that the surviving partner can continue to meet the monthly payments even with the reduced income.
If the lender determines that the surviving partner can afford the mortgage payments on their own, they can continue living in the home without needing to make any changes to the mortgage. The surviving partner will still be responsible for paying the interest each month, but there won’t be any need for refinancing or additional loans.
How Lenders Assess Affordability After Death
To protect borrowers from potential financial strain, lenders perform a thorough assessment during the initial application. This includes:
- Affordability checks for both applicants: Lenders take into account the likelihood of a reduction in household income after one partner passes away. They will assess whether the surviving partner can continue making payments on their own.
- Income reduction planning: Applicants are encouraged to plan for how their income might change in the future. This could include reviewing their pension, insurance, and other financial resources to ensure long-term affordability.
- No refinancing required: In most cases, the mortgage will continue in the name of the surviving partner without the need to refinance, as long as they can still meet the lender’s affordability criteria.
Planning Ahead for Long-Term Affordability
While a RIO mortgage can offer much-needed flexibility, it’s essential to plan for future changes in household income. The affordability assessments done by lenders help ensure that joint applicants won’t be left in a difficult financial situation if one partner dies. However, it’s always wise to discuss these scenarios with your financial advisor and lender during the application process.
For couples considering a RIO mortgage, having a conversation with a later life lending specialist can help you understand all your options and ensure that your mortgage remains affordable even in the event of unexpected changes.
Ready to find out more? Visit our dedicated later life lending page to arrange your free 10 minute discovery call!
Mike Jones
Later Life Lending Specialist
Mike Jones is a later life lending specialist who is responsible for the “Mewstone Later Life Lending” service. Mike has years of experience in retail banking as well as extensive knowledge of the later life lending sector.
Choosing to release money from your home is a big decision and it’s important for you to understand all the options available to you. This means that he will always offer you unbiased advice. It doesn’t matter to us which solution or lender is recommend, as long as it is the right one for you.