How I used a retirement interest only mortgage to gift my sons £100,000 at 71

Peter Smith, 71, started thinking properly about his finances – and passing money on to his children – after the 2024 Budget. It was then that the Chancellor, Rachel Reeves, announced that, from 2027, pensions would be subject to inheritance tax (IHT), prompting Peter to consider whether he would be better off giving his two sons some of their inheritance now rather than leaving it until after he passed away. He has three sources of retirement income: his state pension, a civil service pension and a separate private pension pot. Peter started looking into giving money from the pensions straight to his two children – now aged 37 and 39 – but decided that the tax implications for him were too great. He would pay income tax on the money he withdrew and could also end up being dragged into paying the 40 per cent rate of tax if he used more than £50,270 in a single year. As a result, he started to look at alternatives, and that’s when he came across the idea of using his home to fund the transfer. Peter released £94,000 from equity in his house – a three-bedroom semi-detached property in Fleet, Hampshire, which he owned outright and had lived in for 14 years – and is paying it back via a retirement interest-only (RIO) mortgage. He also gave his sons an extra £6,000 – adding up to £50,000 each. This has enabled him to gift half of the sum to each of his two sons, without paying any income tax or capital gains tax on the money he has now borrowed. “One of my sons has a property with his wife in London that needs a lot of refurbishment and the other son hasn’t got one but is hoping to. It’s very difficult for young people getting properly on the property ladder,” he says. “I came to the conclusion that it was better off giving them some money now rather than them inheriting it in future,” he adds. A RIO mortgage is a later-life loan for borrowers where you pay only the interest on the sum owed each month and it is repaid when the home is sold. Unlike standard mortgages, they generally don’t require you to repay the balance by a fixed end date. Peter’s mortgage has a rate of 5.58 per cent and he repays £437 a month, which he says is “very affordable” with his pension. The loan, which he secured via Saga Mortgages, also allows him to repay up to 10 per cent of the capital flexibly each year as an overpayment, if he can afford to and wishes to. Research from Saga Money has found that more people like Peter feel a duty to help their children on to the property ladder. Some 71 per cent of this demographic believe that the responsibility to support younger family members onto the property ladder has never been more pronounced, it found. Meanwhile, 23 per cent say that they would be open to using a mortgage-based option to help a younger family member buy a home. Of course, for Peter, one downside of taking out an RIO mortgage was going from being payment-free for several years to owing a regular payment to a lender again. But he says this was a price worth paying. He explains: “I came to the conclusion that it’s nice to have a mortgage-free property, but at the same time, there’s a lot of capital tied up in it not doing anything. “I came to the conclusion the money could work harder for me.” Experts say RIO mortgages are a small part of the mortgage market, but could become larger in future years. “We have seen the number of applications grow over the years but it’s still a very small part of the market. That may be partly down to lack of awareness, but as more homeowners look at how they can help family members, RIO could be a good way to tap into that equity,” said David Hollingworth, associate director at L&C Mortgages. “I think RIO mortgages have a really good place in the market for older borrowers wanting to release some equity and are able to not only demonstrate enough income to cover the borrowing but would also prefer to make a monthly payment rather than see interest roll up over time,” he says. But Hollingworth and Alex Edmans, product director at Saga Mortgages, say it’s worth getting advice before making a move. “Experts like mortgage brokers and wealth managers can help make sure you get the best product for your circumstances,” says Edmans.