Homeowners planning on taking out one of the new retirement interest-only (RIO) loans face paying a “shocking” premium for continuing to delay the repayment of their capital balance, according to Royal London.

RIO loans have been billed as a possible solution for anyone who has not saved up enough to repay the capital owed at the end of their interest-only mortgage, as they allow homeowners to continue to borrow on an interest-only basis into their retirements, without being forced to move through the need to downsize or repossession.

There are around 550,000 interest-only borrowers approaching retirement in the UK, according to UK Finance. However, the latest analysis by Royal London shows that the average rate of interest on a RIO loan is 3.62% – roughly double the rate available on the mainstream mortgage market, where a typical best-buy mortgage rate is currently 1.65%.

On an average interest-only loan size of £66,000, payments at 3.62 per cent would be £199 a month – more than double the £91 someone on a typical two-year fixed rate of 1.65 per cent would pay monthly.

Royal London personal finance specialist, Becky O’Connor, explained: “Homeowners who have the dreadful deadline of the end of their mortgage term looming with a capital balance still to repay, may now look towards new RIO loans for salvation.

“However, there is a rate premium for the privilege of continuing to borrow on an interest-only basis and it could cost you double your current monthly interest-only payments. For many borrowers this kind of cost hike, coming at a time of reduced income, will be hard to manage. Such a potential cost hike is a reason not to assume these loans will be a good option for homeowners considering them in retirement.”

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