This case study looks at how a RIO mortgage could help your client stay in their home following a later life divorce
Anne Marie, 55; working as an Executive Assistant
This case study does not represent real people and is for illustrative purposes only.
Anne Marie's story
Anne Marie has a well-paid job working as an Executive Assistant for the CEO of a recruitment firm.
She is going through a divorce but is keen to continue living in the four-bedroom family home where she raised her now grown up children. It's recently been valued at £650,000, after the divorce there will be £330,000 of equity in the home.
She is financially stable but is worried about starting again at an older age, and the financial burden of living off of one salary.
She was keen to pass as much money as she can to her children when she passes away, but her current lifestyle needs have overtaken this objective.
What she wants
- To continue living in the family home alone.
- To borrow £320,000 to remain living in the property.
In order to stay in the house for the long term and not start again, Anne Marie has spoken to a financial adviser to find out her options. They’ve suggested an interest only mortgage into retirement could be an option so she can continue living in her family home.
table Assets Expected outgoings
House value: £650,000
Pension sharing order in place paying £20,000 (from 4 years’ time) from ex-husband’s final salary pension
Own Final Salary Pension of £20,000 from previous roles in financial services payable from age 60
More recently saving into a Defined Contributions Scheme – currently worth £100k (valued at 3.5% income per year from retirement). This remains with her after the divorce
Full state pension entitlement
Living expenses: £1,600 a month
Anne Marie could borrow £320,000 with a Retirement Interest Only (RIO) Mortgage to continue living in the family home. With a dependable income history and sufficient pension funds, she can afford the monthly repayments. However, her final salary pension benefits are non-escalating once in payment, so a haircut will be applied to the amount she can borrow.
On our current RIO Mortgage, she could borrow up to £189,8811, based on her lowest income amount which is her pre-state pension. This would cost her £647 per month2 with a fixed for life interest rate. However, based on her income she could afford repayments of up to £1,166 per month.
With our revised loan to income (LTI) caps for RIO, Anne Marie can now borrow the £320,000 she needs to remain in the property, at a cost of £1,091 per month2. This is lower than the £1,166 per month she can afford to repay.
Benefits for Anne Marie
- She can remain living alone in the family home.
- Her income streams mean she can afford the repayments on a RIO mortgage and pass the affordability checks.
- The certainty of a fixed interest rate for life.
- Because Anne Marie wants to leave an inheritance, a RIO may suit her better than a Lifetime Mortgage as the equity will remain in the property.
- If Anne Marie meets someone else in the future, she could pay a small early repayment charge and combine funds to buy another property in the future.
What are the potential risks?
Your client should think carefully before securing other 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.
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.
1Assumptions: (4.75 x £39,975k – the lower of her salary (£75k), pension pre-state pension age (85%*£3,500 + 85%*£20,000+£20,000 – assuming one of the final salary benefits and defined contributions pot will not be escalating, and one final salary pot will) and pension post-state pension age (pension pre-state pension age +£9,600).
2Based on an interest rate of 4.09% accurate as of 8 April 2022. Subject to change.