Fewer customers are using RIOs for debt consolidation as data reveals a fall from 13% in 2021 YTD to 7% in 2022 YTD. What are the reasons for this shift? What homeowners are switching to will be explored in this article.

What are RIOs, and what do they usually offer customers?

An RIO mortgage is an interest-only mortgage where the interest payments are made to the lender. The capital is repaid when the mortgage ends – selling the property or remortgaging. They were popular before the financial crisis, allowing people to borrow large sums while only making low monthly repayments. However, they fell out of favor after the crisis as it became apparent that many people would not be able to repay the total amount when the mortgage term ended.

The main reason why homeowners are no longer using RIOs for debt consolidation is because of the inherent risk involved in this type of mortgage. With an RIO mortgage, you only pay the interest on the loan, not the principal. If housing prices fall, you could owe more money than your home is worth. This is less of a concern in the current market, where housing prices are rising. However, with another economic downturn, homeowners with RIO mortgages could find themselves in a difficult situation.

There are other options available for debt consolidation that are less risky than RIO mortgages. Homeowners can take out a home equity or personal loan to consolidate their debt. These loans have fixed interest rates and repayment terms, so you know exactly how much you will need to repay each month. There is also the option of a balance transfer credit card, which can offer 0% interest for a period of time. This can help you to consolidate your debt onto one low-interest card and pay it off before the interest rate increases.

Why are customers switching?

One potential reason for this change could be that more customers consolidate their debts before taking out an RIO. This means that when they do take out the mortgage, they have less debt to pay off with the loan. Such a strategy would reduce the total interest paid on the mortgage and the monthly repayments. This would make it easier to keep up with repayments and reduce the chances of falling behind and getting into debt difficulties.

An alternative explanation is that customers use other products to consolidate their debts, such as personal loans or balance transfer credit cards. These products may offer lower interest rates or introductory offers, which make them more attractive than using an RIO. It is also worth noting that some customers may feel more comfortable consolidating their debts with a product from a different lender than their mortgage lender.

Finally, some customers may choose to downsize their homes instead of taking out an RIO and using the equity to consolidate their debts. This would release some cash which you could then use to pay off debts, and it would also reduce the monthly repayments as it would reduce your overall mortgage debt.

Alternatives to using an RIO for debt consolidation

There are several alternatives to using an RIO for debt consolidation. These include taking out a personal loan, using a balance transfer credit card, or downsizing your home. Each option has its advantages and disadvantages, so it is important to compare them before deciding.

Personal loans can be a good option as they usually have fixed interest rates and repayment terms. This means that you will know exactly how much you need to repay each month, and you can budget accordingly. However, personal loans can be challenging if you have a bad credit history.

Balance transfer credit cards can offer 0% interest for some time, which can help you to consolidate your debt and pay it off before the interest rate increases. However, you will need a good credit history to qualify for a balance transfer card.

Downsizing your home can release some cash you could use to pay off your debts. It could also reduce your monthly repayments as your overall mortgage debt could be reduced. Although, this option may not be suitable for everyone as it would involve selling your home and moving to a smaller property.

It would be best if you compared the different options before deciding, as each has its advantages and disadvantages. You should also consider your circumstances to decide which option is best for you.

Final thoughts

There are a number of potential reasons why fewer customers are using RIOs for debt consolidation. It is possible that more customers are consolidating their debts before taking out an RIO or using other products that offer lower interest rates or attractive introductory offers. Some customers may feel more comfortable consolidating their debts with a product from a different lender, and others may choose to downsize their homes instead. Whichever reason is behind the trend, it is clear that fewer customers are using RIOs for debt consolidation than in previous years.