WHEN Richard Jones found himself in £20,000 of debt, he thought he’d be stuck paying high interest rates for the foreseeable future.
The 61-year-old, who lives in Manchester, found himself struggling to keep his head above water after falling for an online cryptocurrency investment scam.
Cryptocurrency is a digital asset that can be traded or exchanged online to buy from people or companies who accept this form of payment.
Richard said that after the first few days, “everything looked okay” and he was £731 in profit, but unfortunately, things quickly deteriorated and he ended up £20,000 down.
In an attempt to get on top of his debt, Richard decided to use a mixture of personal savings and credit cards to pay off the amount.
One of the credit cards he took out had an “eye-wateringly high” interest rate of 34% because of his poor credit score.
Your credit score is used by lenders to help them decide whether to loan money to you.
A low credit score can mean banks deem you too risky to lend to, which can stop you getting a mortgage.
Or, if they will lend to you, you’re typically locked out of the best deals, meaning you have to pay significantly higher interest rates.
Richard, who is the manager of the Warrington Deaf Society, said it was “particularly painful” seeing the £300 card card interest bill leave his account each month.
Despite renting a home in Manchester, Richard also owns a property in Swansea, which he inherited from his parents.
He rents the house out and considered releasing some equity in order to pay off the debt.
Equity release allows you to turn the value tied up in your home into tax-free cash.
But before going down that route, he came across advisory service Saga Mortgages who told him about Retirement Interest Only (RIO) mortgages.
A RIO mortgage is an interest-only mortgage with no set term.
Interest-only mortgages are loans where you pay back only the interest each month and you don’t reduce the size of the debt you owe.
It’s a later life product that comes with monthly interest payments and is only repaid when the property sold, upon your death or if you enter long term care.
We break down all you need to know about mortgages and what categories they fall into.
A fixed rate mortgage provides an interest rate that remains the same for an agreed period such as two, five or even 10 years.
Your monthly repayments would remain the same for the whole deal period.
There are a few different types of variable mortgages and, as the name suggests, the rates can change.
A tracker mortgage sets your rate a certain percentage above or below an external benchmark.
This is usually the Bank of England base rate or a bank may have its figure.
If the base rate rises, so will your mortgage but if it drops then your monthly repayments will be reduced.
A standard variable rate (SVR) is a default rate offered by banks. You usually revert to this at the end of a fixed deal term, unless you get a new one.
SVRs are generally higher than other types of mortgage, so if you’re on one then you’re likely to be paying more than you need to.
Variable rate mortgages often don’t have exit fees while a fixed rate could do.
You’ll only be eligible for a RIO mortgage if you’re over 50 and can afford the monthly interest payments.
With an RIO, you have to find a way to pay of the capital at the end of the term, for example, my selling the property.
On the other hand, a repayment mortgage is paying off the interest and the capital over the time. so there’s nothing left outstanding at the end.
It comes as figures from UK Finance revealed that 32,990 new loans were given to borrowers over 55 between April and June this year – an 8.34% increase from last year.
There were 326 retirement interest only mortgages in the same period, up 23% year on year.
By switching his buy-to-let mortgage to an RIO, Richard was able to pay off the remaining £20,000 credit card debt – and significantly reduce his monthly outgoings.
It’s important to note that the RIO is still a loan, but it has a significantly cheaper interest rate than the credit card Richard previously had.
He said: “I was finally able to get out of the credit card trap.
“It’s a relief to no longer have the stress of seeing the £300 interest
payments each month.”
Nicholas Mendes, mortgage technical manager, at broker John Charcol, said: “RIOs can be a flexible and cost-effective way for retirees to manage finances, allowing them to stay in their homes while accessing equity.
“However, they come with ongoing financial commitments and can affect inheritance.
“It’s essential to consider these factors carefully and consult with a financial adviser to determine if a RIO mortgage aligns with your long-term goals.”
There are several pros of RIO mortgages, according to Nick from John Charcol.
He said: “Since you’re only paying interest, monthly payments are lower than those of a repayment mortgage.”
“As there’s no fixed term, there’s also no pressure to repay the loan by a certain date.”
This can make them cheaper in the short term compared to repayment mortgages, where both interest and principal are paid down over time.
By paying the interest monthly, the principal loan amount remains relatively stable, which can help maintain the property’s equity and helps keep the property’s value for inheritance purposes.
You can also choose from fixed or variable interest rates, with terms ranging from two years to a lifetime.
A fixed-rate mortgage means your monthly payments will stay the same for the length of the agreed term.
Meanwhile, a standard variable rate (SVR) is a default rate offered by banks. You usually revert to this at the end of a fixed deal term.
If you need a little boost to your retirement fund, you can still access the equity in your home without selling it.
Of course, there are lots of things to consider when it comes to equity release, as we explain here.
There are strict requirements with an RIO, including a minimum age, property value and income assesment.
These will vary from lender to lender and may limit some people’s access to these mortgages.
Like with any mortgage, taking on an RIO is an ongoing financial commitment.
This means that anyone who takes one out must keep up with their monthly interest payments for life, or risk losing their home.
There is also a chance that taking out an RIO will lead to an inheritance reduction for anyone set to benefit from your estate after you die.
This is because the loan amount will still need to be repaid.
Lenders often offer lower loan-to-value (LTV) ratios on RIO mortgages, meaning you could borrow less compared to a standard mortgage.
The LTV is the percentage that your bank or building society is lending you to buy your home.
IF you're looking for a traditional type of mortgage, getting the best rates depends entirely on what's available at any given time.
There are several ways to land the best deal.
Usually the larger the deposit you have the lower the rate you can get.
If you’re remortgaging and your loan-to-value ratio (LTV) has changed, you’ll get access to better rates than before.
Your LTV will go down if your outstanding mortgage is lower and/or your home’s value is higher.
A change to your credit score or a better salary could also help you access better rates.
And if you’re nearing the end of a fixed deal soon it’s worth looking for new deals now.
You can lock in current deals sometimes up to six months before your current deal ends.
Leaving a fixed deal early will usually come with an early exit fee, so you want to avoid this extra cost.
But depending on the cost and how much you could save by switching versus sticking, it could be worth paying to leave the deal – but compare the costs first.
To find the best deal use a mortgage comparison tool to see what’s available.
You can also go to a mortgage broker who can compare a much larger range of deals for you.
Some will charge an extra fee but there are plenty who give advice for free and get paid only on commission from the lender.
You’ll also need to factor in fees for the mortgage, though some have no fees at all.
You can add the fee – sometimes more than £1,000 – to the cost of the mortgage, but be aware that means you’ll pay interest on it and so will cost more in the long term.
You can use a mortgage calculator to see how much you could borrow.
Remember you’ll have to pass the lender’s strict eligibility criteria too, which will include affordability checks and looking at your credit file.
You may also need to provide documents such as utility bills, proof of benefits, your last three month’s payslips, passports and bank statements.
A number of lenders offer RIO mortgages, including high street building societies.
Nationwide offers two RIO mortgages, one as a five-year fixed and another as a ten-year fixed, both with a fixed rate of 4.66%.
They also both offer a maximum LTV of 50% and have no product fees.
Leeds Building Society has three RIO products on offer.
One is a five-year fixed rate of 5.19% with a maximum LTV of 50%, which also has a product fee of £999.
There is another five-year fix with a rate of 5.34% with a maximum LTV of 50%, but it does have no product fee.
Leeds BS also offers a two-year fixed rate of 5.35% with a maximum LTV of 50% and no product fee.
Lower mortgage rates sometimes comes with costly product fees and it can be hard to tell whether it’s worthwhile.
It all depends on your individual borrowing level – sometimes a big product fee is worthwhile to get the lower rate.
A good broker should be able to do the sums and find the deal that will cost you less.
Smaller lenders including Nottingham Building Society and Buckinghamshire Building Society also offer RIO mortgages.
To find the best deal use a mortgage comparison tool to see what’s available.
You can also go to a mortgage broker who can compare a much larger range of deals for you.
Some will charge an extra fee but there are plenty who give advice for free and get paid only on commission from the lender.
There are several groups which can help you with your problem debts for free.
You can also find information about Debt Management Plans (DMP) and Individual Voluntary Agreements (IVA) by visiting MoneyHelper.org.uk or Gov.UK.
Speak to one of these organisations – don’t be tempted to use a claims management firm.
They say they can write off lots of your debt in return for a large upfront fee.
But there are other options where you don’t need to pay.
