Retirement Interest Only Mortgages

If you’re over 50 and looking for a mortgage in the UK, then retirement interest only mortgages (RIO) might be a good option.

As you near retirement age, getting a new mortgage or remortgage can become harder. In such cases, a RIO might be a great option to use up some of the locked value in your home. This has comparisons to an equity release scheme, albeit with some differences.

In this article, we will take you through the entire concept of Retirement Interest Only mortgages and help you understand whether it’s a good option for you.

Let’s begin. 

What Is Retirement Interest-Only Mortgages?

Retirement interest-only (RIO) mortgages can be used by older borrowers who might find it hard to take out any other kind of mortgage. 

It’s similar to a normal interest-only mortgage but more tailored to suit retired persons and certain individuals.

Here, you can take out a loan against the property value and pay back only the interest amount every month, not the capital. 

The capital needs to be paid back when the property is sold. This can happen in multiple situations, such as death or moving into a care facility.

Getting a RIO mortgage can be easier than a standard mortgage because of the lesser burden of repayment of the capital. 

All you need to do is prove to the lender that you can afford to pay the interest amount each month with most lenders rather than a capital repayment affordability assessment.

How Does A Retirement Interest Only (RIO) Mortgage Work with Example

Now that you have a fair idea of a RIO mortgage, let’s understand it better with an example. 

Say X and Y own a property valued at around £400,000 and get a RIO mortgage of 25% of their property value, which is £100,000. Let the rate of interest be around 5%. 

Now, 15 years later, the house value increases and becomes £600,000. At this point, both X and Y move into a permanent care facility, and the property is sold.

Now, over 15 years, X and Y have only paid back the interest amount in monthly repayments, so they still have to pay £100,000 (the capital amount) to the lender. 

This is paid when the property is sold off, so even after the loan is paid off, X and Y are left with £500,000. Of course property appreciation cant be guaranteed, but the above acts as an example. 

Where Can You Get A RIO Mortgage?

RIO mortgages are offered by a variety of lenders which includes banks and building societies. 

In case you’re not sure about which lender to go with, you can connect with our experienced mortgage brokers who can get you the most suitable deals for your circumstances. 

You can connect with our mortgage advisors by calling, submitting the form on this page, or through WhatsApp.

Differences Between RIO and Lifetime Mortgages

RIO mortgages are considered similar to lifetime mortgages as both are usually used as a form of equity release. But even then, there are some differences between the two to be aware of.

With a lifetime mortgage, you can choose whether you want to pay off the interest every month or not. In case you don’t, the interest amount simply compounds. But in a RIO mortgage, you always need to pay off the interest every month. 

RIO mortgages are obtainable if you’re 50 years or older; this is less than the eligibility age of a lifetime mortgage. 

Finally, Lifetime mortgage application and approval processes are usually more stringent than those for RIO mortgages as additional FCA equity release guidelines will need to be met.

Advantages And Disadvantages Of Retirement Interest Only Mortgages

1. Potentially Eligibility Criteria

Eligibility for RIO mortgages can be simpler as you only need to prove that you can pay the monthly interest amount. 

It’s worthwhile to keep in mind that some lenders will allow you to pay off a part of the capital amount as well if you want to decrease the final payable amount through an overpayment allowance.

2. Better Affordability 

Since in an RIO mortgage, you only need to pay back the interest every month, this means that your monthly payments are smaller than if you had to pay off a part of the capital as well. 

Also, since this type of mortgage doesn’t have a fixed repayment period, you don’t need to pay it all back after a fixed time which can offer flexibility to the borrower.

3. Better Value when compared to certain equity release products

RIO mortgages ensure that you pay less in the long term potentially compared to certain equity release products as the interest is rapid and not compounding.

Although they are similar to other equity release instruments like lifetime mortgages, they don’t allow the interest to compound.

This ensures that you’re paying less interest.

4. Fund Availability Post Retirement

With RIO mortgages, you’re able to unlock the value of your property and get access to extra funds. 

This ensures you have ready money for purposes such as another property purchase, gifting, etc.

Finally, one of the significant disadvantages of a RIO mortgage is the risk of repossession. If you default on your monthly payments for some reason, you could risk losing your property as the loan is secured against it. 

How Much Can You Borrow With A RIO Mortgage?

The amount you can borrow through a RIO mortgage primarily depends on your lender’s affordability assessment process and the value of your property, against which you’re taking out the loan.

For the affordability assessment, several factors are considered, such as income, expenses, and even age and health. 

Lenders will also take into account the LTV ratio of your RIO mortgage. Higher LTV means greater risk, so your interest rate will be higher and the lender may impose a lower borrowing amount.

It’s also important to understand that since a RIO mortgage is an interest-only mortgage, lenders will be willing to lend less than they would for a standard capital repayment mortgage as they usually require more equity in the property.  

For instance, if you’re able to borrow 80% of your home’s value with a standard mortgage, with an interest-only mortgage, you’ll may only be able to borrow 65-70%.

Frequently Asked Questions (FAQs)

1. What happens to my RIO mortgage when I die?

The rule here is that once all the persons who have taken out the RIO mortgage have either died or moved into long-term care, the property is sold and the proceeds are used to settle the loan amount. 

2. Is it possible to remortgage a RIO mortgage?

Yes, it is possible to remortgage a RIO mortgage, but in case you’re looking to switch providers or get a larger amount, the lender might require another affordability assessment and meeting fresh criteria etc… 

3. What are the product fees associated with a RIO mortgage?

The costs and fees associated with a RIO mortgage vary from provider to provider across products, but you can expect to spend anything in the range of £1,000 to £3,000.  

The costs include arrangement fees, completion fees, survey and valuation fees, as well as solicitor and broker fees. 

4. What happens if I miss paying the monthly interest amount?

This can become a problem as mentioned already, since it’ll result in your home getting repossessed. If you can’t afford to pay back your loan for some reason, we recommend talking with your lender immediately and reaching a solution.

Please bear in mind this article is for information purposes only and any advice surrounding equity release products will need to be given by an advisor who holds the relevant qualification with the FCA. 

Your home may be repossessed if you do not keep up repayments on your mortgage.

All content is written by qualified mortgage advisors to provide current, reliable and accurate mortgage information. The information on this website is not specific for each individual reader and therefore does not constitute financial advice.