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Retirement interest only mortgages

Retirement interest-only (RIO) mortgages are home loans for older borrowers who want to free up equity from their home, or combine paying for their home with saving for retirement or care costs.

They used to be classed alongside equity release mortgages, but a few years ago the regulator reclassified them as standard mortgages, and that has allowed a wider range of lenders to step into the market.

How do retirement interest-only mortgages work?

RIO mortgages require borrowers to make monthly interest payments until they die or go into long-term care.

They’re similar to normal interest-only mortgages where you make only the monthly interest repayments and rely on an alternative investment method, alongside house price growth, to repay the principal loan at the end of the mortgage term.

However, there is a significant difference with an RIO mortgage. Rather than relying on an alternative investment to pay off the loan, an RIO mortgage needs to be repaid only when the house is sold, when you die or when you move into long-term residential care.

As a result, when you apply for an RIO mortgage, you have to prove only that you can afford the monthly interest repayments. You don’t have to give evidence of how you intend to repay the loan capital because the method of repaying it is already agreed.

Who can get a retirement interest-only mortgage?

They’re targeted at older borrowers, typically people over 55 or approaching retirement, although there’s often no minimum or maximum age requirement.

Because of the lower monthly repayments RIO mortgages have, RIO loans are more suitable than equity release products for borrowers in retirement who have a secure retirement income source, such as a defined benefit pension.

If you have a less secure income or don’t want to commit to regular monthly repayments for the rest of your life, equity release may be a better option.

Meanwhile, if you’re still working part-time with a regular income but not enough to take on an RIO loan, you might like a hybrid product that allows you to pay some or all of the monthly interest but with the option of stopping the payments and letting the interest be ‘rolled-up’ for a period and added to the overall loan.

How are RIO mortgages different from lifetime or equity release mortgages?

Equity release lifetime mortgages are loans secured against the value of your property that allow you to release some of the equity you’ve built up.

They’re available to over-55s and must be repaid only when you die, sell the home or go into care. To that extent, RIO mortgages work in a similar way.

But with a lifetime mortgage you’d normally have a larger amount to repay at the end because you don’t make monthly interest repayments. Instead, the interest is added on to the total loan value to be repaid at the end. The interest charges are compounded over time – in other words, you pay interest on the interest – and that means the repayment made to the lender when the balance is finally repaid can be much higher than the loan that was originally taken out.

With a RIO mortgage, the only thing that will need to be paid back at the end is the original loan capital, because you’ll have been paying back the interest along the way.

Things to remember about retirement interest-only mortgages

RIO mortgages let you unlock some of the equity in your home to pay off outstanding debt, they can help you avoid having to downsize to a smaller property in retirement, and they are usually cheaper than equity release lifetime mortgages.

You will need to pass affordability checks to prove you can cope with the interest-only repayments.

You are likely to leave a larger inheritance than if you opt for a lifetime mortgage, but you’ll have less to pass on to your loved ones than if you had cleared a repayment mortgage.

Just like with any other mortgage, your home is at risk if you don’t keep up with the monthly interest repayments on an RIO mortgage.

The amount you can borrow is linked to your earnings, which, later in life, could be limited, so you may not be able to borrow as much. Borrowing levels are also linked to your loan-to-value (LTV) ratio, the proportion of the value of the property you own.

Can you switch to a retirement interest-only mortgage?

It’s possible to switch from either a repayment mortgage or an interest-only mortgage to an RIO mortgage, but it might mean you have to take new affordability assessments with a new lender which could cause you problems, depending on your circumstances and if you need to borrow more.

If you have an interest-only mortgage but no satisfactory plan in place to repay the capital at the end of the mortgage term, switching to an RIO product, and using the future sale of the house as security, could be a useful option for you.

Retirement interest-only mortgage rates and deals

Since the regulator reclassified RIO mortgages as standard mortgages, some of the traditional high-street lenders have joined the party.

Rates aren’t as cheap as repayment mortgages for the same LTV ratios but as more lenders enter the market, they are becoming more competitive with more discounted rates.

17th June 2020