This case study looks at how a RIO mortgage could help your client improve their home
Dave and Sue, 70 and 72; retired
This case study does not represent real people and is for illustrative purposes only.
Dave and Sue's story
Retired couple Dave and Sue are 70 and 72 respectively.
Dave was formerly a pilot, and Sue retired five years ago from her job as a computer programmer.
Dave is quite financially aware and has been investing in a Self-Invested Personal Pension (SIPP) for a number of years which he uses to draw an income from.
Sue has invested in a personal pension for a number of years, which she has used to purchase an annuity.
They have paid off the mortgage on their four-bedroom detached home in Chelmsford, and they also own an apartment in Spain outright which they use to take regular breaks.
What they want
- To raise money for home improvements.
- To stay in their home for as long as possible
Dave and Sue have ambitions to build an extension, including a ground floor bedroom and en-suite bathroom in case their mobility worsens. They wish to remain living in the property as long as possible but are mindful they are not getting any younger. They also need their double-glazing replacing throughout and would both love a new kitchen, a walk-in shower and to replace all the carpets.
The house renovations have been quoted at £180,000 but they think £200,000 will help them complete the renovations to a high standard. They are happy to use some of their savings to cover any extra costs if required. Dave has contacted his Financial Adviser for a face-to-face appointment to discuss their options.
table Assets Expected outgoings
House value: £450,000
Second property: £140,000
Dave’s SIPP is worth £410,000 and he’s taking an annual income of £14,350 from it
Sue’s annuity is worth £15,000 per year after tax
Dave and Sue's combined State pensions just over £15,000 per year
Joint Whole of Life Insurance policy paying out £75,000 when either dies
Living expenses: £1,200 a month
The value of Dave's drawdown pot and any income taken from it is not guaranteed and can go down as well as up.
Dave and Sue could take out a Retirement Interest Only (RIO) mortgage to release the capital they need to renovate their home. Their combined incomes mean they can afford the monthly interest repayments.
Although they could also consider taking out a lifetime mortgage, their repayments on a £200,000 RIO mortgage would be £682 per month1, which is less than an equivalent lifetime mortgage2. As they have a Whole of Life insurance policy that will pay out £75,000 in the event of either of them dying, the option on a RIO to repay part of the loan following the first death is also appealing. If they repay their Retirement Interest Only Mortgage early, or pay more than the overpayment limits, there may be an Early Repayment Charge.
In the event of Dave's death, the remainder of his SIPP will pass to Sue. They have also indicated that they could sell the apartment in Spain if they become widowed or one on them moves into long term care, providing an additional source of income.
Benefits for Dave and Sue
- A RIO mortgage would provide them with the capital to complete their home renovations.
- The certainty of a fixed interest rate for life.
- They can remain living in their home which they are very keen to do.
- Their income streams mean they can afford the repayments on a RIO mortgage and pass the affordability checks.
What are the potential risks?
Your client should think carefully before securing debts against their home. As a last resort, their home may be repossessed if they don't keep up repayments on their mortgage.
Their ability to make the payments may be affected if:
- Their income falls in the future.
- Their expenditure increases in the future.
- Inflation reduces the purchasing power of their income.
- One of them dies (they'll need to consider whether the death benefits of their partner's pension scheme will be enough for them to continue making the interest payments).
Taking out a mortgage in later life could limit their future choices too. For example:
- It might affect their family's inheritance when they die.
- They may not be able to afford any additional care needed in later life.
- Their future choices in moving home could be limited.
- Opportunities to borrow from other sources could be limited.
- If the loan is for life, they'll repay the loan from the proceeds of the sale of their home when the last borrower moves into long-term care or when they die.
1Based on an interest rate of 4.09% accurate as of 8 April 2022. Subject to change.
2Compared to an equivalent Lifetime Mortgage product with an 4.91% interest rate. Accurate as of 11 April 2022. Interest rates are subject to change.