This case study looks at how a RIO could improve their home.
Barry and Fiona, 70 and 65; both retired
This case study does not represent real people and is for illustrative purposes only.
Barry and Fiona's story
Barry is 70 and retired from his job as an insurance broker. Fiona is 65 and retired three years ago from her job as a secretary, but has chosen to supplement her income by working part-time as a retail assistant at Stansted Airport.
Barry, because of his former career, is quite financially-savvy. He has been investing in a Self-Invested Personal Pension (SIPP) for a number of years, which he uses to draw an income from. He also took a lump sum at retirement to treat his family to a big holiday. Fiona has invested in a personal pension for a number of years, which she has used to purchase an annuity.
They also own an apartment in Spain outright which they use for regular breaks.
What they want
- Extra money to extend and carry out significant renovations to their home.
- To remain in the family home and avoid having to move or downsize.
- To spend more time with their family.
- To leave an inheritance for their children and grandchildren.
Barry has contacted his Financial Adviser and they've had a face-to-face meeting to conduct a fact find. They're awaiting a full recommendation.
They've paid off the mortgage on their four-bedroom detached home in Chelmsford. But they've ambitions to build an extension, which would include a bedroom and en-suite bathroom for when their children and grandchildren visit. They're also aware of the pressing need for some repairs as the double glazing needs replacing throughout the home, they'd also like a new kitchen and to replace all the carpets.
The house renovations have been quoted at £130,000 and they're happy to invest some, but not all, of their savings to help cover the cost.
table Assets Expected outgoings
House value: £580,000
Second property value: £140,000
Barry's SIPP: £210,000 (Annual income £7,350)
Fiona’s annuity: £8,000 after tax per annum
Fiona's job: £7.000 after tax per annum
Combine State Pension: £13,000 a year
Joint whole of life insurance policy: £75,000, pays out when either of them dies
Living expenses: £2,000 a month
A RIO mortgage is one way of releasing the capital they need to upgrade the house. The loan-to-value ratios are comfortable, and based on their retirement income they could afford the interest payments.
Barry is the higher earner, but in the event of his death, the remainder of his SIPP will pass to Fiona.
They've also indicated they would look to sell the apartment in Spain if they become widowed or one of the two goes into long-term care, providing an additional source of income.
They also have a joint whole of life insurance policy which will pay out £75,000 in the event of either dying.
Benefits for Barry and Fiona
- A RIO would allow them to remain in their own home, which they're very keen to do.
- It would also provide them with the capital to complete its refurbishment and fulfil their other objectives of having the family to stay more frequently, and treating them as well.
What are the potential risks?
Your client should think carefully before securing other debts against their home. 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.
Taking out a mortgage in later life could limit their future choices too. For example:
- It might affect their family's inheritance when you 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 enters into
long-term care or when they die.