This case study looks at how a RIO could be used to pay off an interest-only mortgage.
Chris and Pauline, 66 and 68; both retired
This case study does not represent real people and is for illustrative purposes only.
Chris and Pauline's story
Chris and Pauline are 66 and 68 respectively and have recently retired. They live in West Malling, Kent. They were both teachers and Pauline also spent a number of years as a primary school head teacher.
They lead a comfortable life, thanks to their local authority Defined Benefit (DB) pension scheme (also known as a final salary scheme). This allows them to indulge in their passions, like travelling, cycling and spending time with their grandchildren.
Their major financial concern is the outstanding mortgage on the property they bought 24 years ago. As money was tight, they bought it using an interest-only mortgage and have never arranged a capital repayment plan. The mortgage term ends in six months’ time and they're not sure how they'll repay the outstanding capital of £95,000. The property is a three-bedroom semi-detached house and is now worth £395,000.
What they want
- Find a solution for their interest-only mortgage that is due to mature in six months’ time.
- Stay in the home they have raised their family in and remain in the local neighbourhood, close to their grandchildren.
- Leave an inheritance for their children and grandchildren.
Chris and Pauline have spoken to a mortgage broker who was recommended by a friend, to ask about their options. They're aware of the increase in the value of their home and have considered their options to downsize or move somewhere a little further out. However, they're keen to remain in the home they've lived in for many years to enjoy their retirement, close to their children and grandchildren. They would also like the house to form part of the inheritance they leave for their family.
table Assets Expected outgoings
House value: £395,000
Outstanding mortgage: £95,000
Joint annual income after tax: £45,000
Combine State Pension: £13,486
Interest only mortgage: £310 a month
Living expenses: £1600 a month
Chris and Pauline have the means to pay the interest on their mortgage but not the outstanding debt.
They could use a RIO with a fixed interest rate for life. Their joint Defined Benefits (final salary) pension payments are also guaranteed, so they'll have the security of knowing they can cover the payments throughout their retirement.
Even if Pauline, whose income is higher, dies first, the spousal benefit rules of her pension scheme apply. This means that Chris would continue to receive half of her pension income plus his own and the state pension. Ideally they want to borrow £115,000 to clear the existing mortgage, travel, treat their children and grandchildren and spend more time with them.
Benefits for Chris and Pauline
- They can pay off the mortgage and stop worrying about it, meaning they’ll stay in the house they raised their family in.
- The certainty of a fixed interest rate for life.
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.