Retirement interest only mortgages
Retirement interest only mortgages are relatively new mortgages designed for older homeowners. Like standard interest only mortgages, you just make monthly repayments against the interest. However, unlike standard interest only mortgages, with a retirement mortgage the capital is only repaid once you die, move into care or sell your property.
The following information explains how this type of mortgage works and the pros and cons so you can decide if a retirement interest only mortgage is a good idea for you.
What is a retirement interest only mortgage?
Retirement interest only mortgages or RIO mortgages as they’re also known are home loans for older borrowers struggling to get a standard residential mortgage. Eligibility for this type of retirement mortgage is easier as you only need to prove you can afford monthly repayments against the interest, not the capital.
This also means that the monthly repayments are lower compared to residential mortgages, which can appeal to retirees or those making future retirement plans.
How do retirement mortgages work?
With a retirement interest only mortgage a loan is secured against your property. You make monthly repayments against the interest however there is no policy term by when you must repay the loan. Instead the capital is repaid once you die, move into long term care or sell your property.
Your retirement mortgage interest rate is fixed for a number of years, the length of which will depend on the lender. Once you come to the end of your fixed term, you will either move to your lenders variable rate or remortgage to another retirement mortgage deal.
Although you are only required to repay the interest on retirement mortgages, some mortgage providers allow you to repay a percentage of the capital each year. Also, some RIO mortgage providers give you the flexibility to change to a lifetime mortgage at a certain point, if you decide the monthly repayments are too much.
Who needs a retirement mortgage?
As older borrowers are eligible for this type of home loan, retirement mortgages appeal to those:
- Coming to the end of an existing standard interest only mortgage
- Looking to buy property suitable for retirement
- Wanting to unlock some of the equity in their property to pay off bills, boost retirement income or help family
How much can I borrow with a RIO mortgage?
The amount you can borrow with a RIO mortgage will depend on the lender, your age, income and property value. Generally, it will be less than with a mortgage where you also repay the capital.
For example, with an interest only mortgage, you may be able to borrow up to 50% of the property value whereas with a capital repayment mortgage, the loan could be as much as 65%.
Can I get a retirement interest only mortgage?
To get a retirement mortgage you need to:
- be 55 or older
- prove you can afford the monthly interest repayments
- have significant capital in your property
How do older borrowers prove their income?
Although with a retirement mortgage you only need to demonstrate you can afford monthly repayments against the interest, as an older borrower you still need to prove you can generate an income. This can be done several ways:
- Company pension forecast
- Annuity statement
- State pension statement
- Bank statements
Are retirement interest only mortgages safe?
Retirement interest only mortgages are safe as long as you choose a reputable Financial Conduct Authority authorised lender. However as with standard residential mortgages, the loan is secured against your property. Therefore you will need to keep up with your payments or your home could be repossessed.
Retirement interest only mortgages vs equity release
Retirement interest only mortgages and equity release are both designed for older borrowers. The main difference with equity release is there are no monthly repayments as the loan plus interest are repaid when you die or move into care. Whereas with a retirement mortgage, you repay the interest monthly.
So, with an equity release lifetime mortgage, both the interest and the loan grow. However, with a retirement mortgage, because you are repaying the interest, the size of the loan remains the same. This means you will have more inheritance to leave to family with a RIO mortgage than a lifetime mortgage.
However as there are no repayments with equity release, eligibility is straightforward with no affordability checks. In addition, you don’t have to worry about monthly payments.
To understand which option is best for you, you could speak to an expert like Age Partnership who is qualified to give advice on both RIO mortgages and equity release. Their advice is free and they can help guide you in the right direction.
What are the pros and cons of retirement interest only mortgages?
The pros and cons of retirement interest only mortgages will help you decide if this type of home loan is right for you.
The pros of retirement mortgages
- Cheaper interest only monthly repayments
- Available for older borrowers
- The capital is only repaid when you die, move into care or sell your property
- Interest rates tend to be cheaper compared to lifetime mortgages
- The interest isn’t compounded as it is with equity release
- You can stay in your home (as long as you keep up with the monthly repayments)
- Some lenders give you the option to repay some of the capital each year
The cons of retirement mortgages
- You must prove you can afford the repayments
- Loan to value is lower compared to other mortgages
- The interest rate is only fixed for a number of years so your payments could increase
- If you renew at the end of the fixed term you may incur additional charges
- Your home could be repossessed if you don’t keep up with the repayments
- There’s no protection from any drop in property prices
- As the capital is repaid from the sale of your property, it will affect your family’s inheritance
Are retirement interest only mortgages a good idea?
Retirement interest only mortgages could be a good idea if you’re coming to the end of a standard interest only mortgage and can’t repay the loan, or you want to release equity from your property. However, it may not be a good idea if you can’t afford the monthly repayments.
In this instance equity release may be preferable, which is why it could be worth speaking to a specialist qualified in both options. Many offer free initial advice so they could help you understand whether a retirement mortgage is a good or bad idea for you.
What should I do now?
Need some free advice – please email us with your name, postcode, telephone number and date of birth and we will get Age Partnership to contact you.
Alternatively, if you would like to know more about lifetime mortgages – read our guide to equity release.
Frequently asked questions about RIO mortgages
What is a RIO mortgage?
A RIO mortgage or retirement interest only mortgage lets older homeowners release equity from their home. The main difference is you only make monthly repayments against the interest and the capital is repaid once you die, move into long term care or sell your property.
Can I get an interest only mortgage at 55?
Retirement interest only mortgages are available to homeowners aged 55 and over. You must have sufficient capital in your property and prove you can afford the monthly interest repayments. Alternatively, lifetime mortgages let over 55s release equity with no monthly repayments, so there are no affordability checks when you apply.
What is the current interest rate for RIO mortgages?
The interest rate for RIO mortgages will depend on the lender and the deals available. For more information and a personalised quote, please email us with your name, postcode, telephone number and date of birth and we will get Age Partnership to contact you.
What happens when an interest only mortgage ends?
A RIO mortgage ends when you sell your property, die or move into care. At this point, the capital must be repaid from the proceeds of the sale of your home.