A retirement interest-only mortgage can be used in a similar way to equity release products, but are often favoured by those looking to leave an inheritance. We look at what retirement interest-only (Or RIO) mortgages are, how they work, to help you decide if they're the right option for you.
Retirement interest-only mortgages are a mortgage product available to the over 50s, although many lenders have a minimum age limit of 55. They have no end term, so you won’t need to repay the capital (loan) in your lifetime, just the interest charged on it.
This can be a helpful option for those older applicants who can't meet the affordability criteria for a traditional mortgage or remortgage. They are often used by people who can’t afford to repay the final lump sum on the standard interest-only mortgage they took out to buy their home, but don’t want to sell it.
They can also be used to borrow money against the equity in your home for other purposes, much like with an equity release product.
Often referred to as a RIO mortgage or retirement mortgage, it can only be secured on your own residential home, whether you’re purchasing or remortgaging one that you already own.
It works in a similar way to a traditional interest-only mortgage, in that you pay monthly interest charges on the amount you borrow, but don’t repay any of the actual loan. The difference here is that a RIO has no term end date.
This means that where you would usually repay the loan back as one lump sum at the end of the mortgage term with a standard interest-only mortgage, with a RIO, you’ll only have to pay this back when you sell the property. This is usually when you die, or move into long-term care.
Some lenders provide an option to repay capital as well as interest, if you can afford to do so and would like to, but there is no obligation to do so. The benefit of this is mainly to maximise the amount that is left over for inheritance purposes.
You can usually move home if you have a retirement interest only mortgage secured against it. However, it’s also helpful to know that if you take one out jointly and your partner dies, you wouldn’t need to sell the property if you didn’t want to.
You own a property with your partner which is worth £200,000
You take out a RIO mortgage of £100,000
You pay ongoing monthly interest at a fixed rate on the £100,000
When you go into long term care or pass away, the lender sells your home for £275,000 due to an increase in property value - although bear in mind that properties can also lose value!
The lender keeps £100,000 of the proceeds of your home’s sale to repay the loan and the remaining £175,000 is yours to pass on to relatives or pay for later life care
The criteria are fairly straightforward, you’ll typically need to be above the minimum age for your chosen lender and prove that you’ll be able to repay the loan. Here are the full criteria:
Age limit - Be 50+ although the requirement varies by lender. Despite the name, you do not need to be retired to take out the mortgage
Residential home for security - You must be buying or already own your main residential home
Minimum property value - your property must be worth a minimum of £70,000 - there may be some variance between lenders and some properties may need to be worth more - e.g flats, ex-local authority properties etc
Affordability - You’ll need to provide evidence that you can afford the monthly interest repayments - which will be much lower than a typical mortgage as there is no monthly capital element to pay
Lenders will usually need proof of your employed or self-employed income, but as the loan extends through retirement, you’ll also need to show proof of income post-work. Most lenders will consider the following as proof of retirement income:
Spousal or maintenance payments
Savings and/or Investment income
Rental income from buy-to-let, holiday or commercial investment properties
Certain benefits - what’s accepted varies between lenders
Each lender has their own method for calculating your loan, but it’s usually based predominantly on affordability and the value of your home.
Like standard mortgages, the loan-to value (LTV) ratio of your borrowing will also be a consideration, and lower LTV loans will be easier to qualify for.
As interest-only mortgages are generally more risky than repayment mortgages, it’s unlikely your loan would be offered at the same LTV as an equivalent repayment mortgage. You’ll also pay more interest on your loan, the higher the LTV of your borrowing.
Although they work in a similar way and are often used for the same purpose, RIO mortgages differ to lifetime mortgages in a few key ways:
|Factor||RIO mortgage||Lifetime mortgages|
|Interest payments||You have an obligation to pay the interest each month||You can choose not to - but by not paying it the interest will compound over time and eat into any profits you have left over when your home is sold to pay off the loan|
|Affordability criteria||As you’ll need to prove that you can afford the interest repayments, a RIO can be harder to qualify for||Those unable to repay monthly interest charges will usually opt for a lifetime mortgage instead as there is no affordability criteria|
|Risk||RIO mortgages are more widely available and do not require advice - however it’s recommended that you still seek advice from a mortgage broker||Lifetime mortgages pose a greater risk to your investment due to the potential for compounded interest to reduce your estate, specialist advice must be taken from a specialist equity release broker|
|Age limits||Some RIOs are available from 50+||Lifetime mortgages are not available to the under 55s|
As you’re repaying the interest it will not roll-up (build over time), so you’re more likely to have profits left over from the sale of your home to leave as inheritance, or your chosen purpose
The monthly payments on an interest-only mortgage are much more affordable than on a capital repayment mortgage, which would typically be used for residential homes
You won’t need to sell your home - unless you want to - for the rest of your life
Less risk to the value of your estate than a lifetime mortgage as you have to repay the interest
Loans can be used for anything from repaying an existing mortgage to improving your lifestyle during retirement
More difficult to qualify for than a lifetime mortgage as you’ll need to pass affordability tests
You won’t be able to leave the property to a relative as it will need to be sold to repay the debt
As with standard mortgages, the loan is secured against your home, so you’re still vulnerable to repossession should you fail to make the repayments - although it may be possible to avoid this by switching to an equity release product
A RIO mortgage could potentially affect any means-tested benefits or pension credit you receive
There are a wide range of lenders offering RIO mortgages, although you’re unlikely to find many high street banks offering them. Most RIO lenders tend to be building societies, such as Nationwide and The Family Building Society - as well as specialist lenders, like LV.
As with any mortgage product, there is plenty of competition across the market, so it’s certainly worth speaking to a mortgage broker. They can help you to find the most suitable retirement interest-only mortgage for your needs, at the best rates available to you.
As there is no set term, you won’t need to repay the loan until you sell your home. This is usually when you move into long-term care or pass away.
The lender will take what you owe from the property sale and any remaining funds can be used as you wish. Many people leave this as an inheritance for their family.
There is no maximum age, although there is a minimum age requirement of 50-55 years, depending on the lender.
You’ll need to check the terms and conditions of your specific product, but most are portable, yes, so you can take your mortgage with you to a new property if you wanted to.
It’s also important to keep in mind that the lender will need to approve the new property as security for the loan. To downsize, to a cheaper property, you may need to pay off some or all of the RIO with the proceeds of the sale.
Yes, it’s possible. Keep in mind that this would require another affordability assessment. If your circumstances have changed since you took out the mortgage, for example you'd retired, it may be more difficult to meet the same level of affordability.