Tembo's deposit boost* service allows families to arrange a retirement interest only (RIO) mortgage with a regular first-time buyer mortgage. The RIO is a relatively new product, and has had little exposure - meaning very few people know about it. We'll take you through the basics here.

The use case for a RIO

If someone in your family is fortunate enough to own their home, it's likely that it makes up the majority of their overall net worth. They may be asset rich due to the value of the home, but cash poor as they don't have much money freely available to spend. A parent or grandparent may want to help their younger relatives with a leg-up onto the property ladder; many will have benefited from a significant uplift in property values over the past 50 years and they may want to pass some of that on. However, if they don't have the cash sitting around, they may feel unable to help.

This is where the Retirement Interest Only (RIO) mortgage can step in.  This is a relatively new product that was authorised by the financial regulator in the UK in 2018. A RIO allows people who are aged over 55 to take out an interest-only mortgage against their property. This enables them to release some cash whilst at the same time allowing them to remain in their home. The benefit is that they can then assist their family members whilst also retaining their lifestyle.  There are also potential inheritance tax benefits. Tembo is not authorised to offer tax advice, and we suggest you speak to a specialist to understand implications.

In order to get a RIO the owners of the property need to pass some affordability criteria based on their income and pension. The maximum amount that can be borrowed is generally around 50% of the value of the house although some lenders will go up to 75%. The interest on the RIO is paid each month. The actual loan amount of the RIO will then be paid off when the house is sold, or if the funds are repaid to the bank.

How is a RIO different to equity release?

The concept of releasing equity from your home is not a new one, but for many there is a perception that equity release is a last resort when you've run out of other options.

The RIO is different to equity release and can be a cost effective way to unlock funds. There are three key differences to equity release:

• Interest cost. The interest rates can generally be lower for RIOs compared to Equity Release products (known as "Lifetime Mortgages"). The average equity release product was around 4.5% in 2020 compared to 3.4% for RIOs.
  
• There is no rolled-up interest with a RIO. Typically you don't pay interest each month on an equity release loan.  Instead it just "rolls-up" each month. This means that it has the potential to snowball and you get interest, on interest, on interest, so the loan gets bigger and bigger each month. Some Lifetime Mortgage providers have made steps forward on this, and now offer increased flexibility to avoid this rolling interest so customers can repay each month. However, with a RIO you always pay the interest each month so the loan never gets any bigger than it was on day one.

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