Blog > Retirement interest only mortgages vs equity release

Retirement interest only mortgages vs equity release

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By Clare Yates • 18th April 2023 • 6 min read

How do retirement interest only mortgages compare to equity release?

Today’s older homeowners have a range of lending options available to help boost their finances. Of course, with that comes the need to research and understand the options to decide which might be most suitable. Two such products worth a look are retirement interest only mortgages (RIOs) and equity release.

To save you time figuring out the key differences and similarities of these two financial products, we’ve put together the following information:

  • What is a retirement interest only mortgage?
  • What is an equity release plan?
  • Is a RIO mortgage the same as equity release?
  • What is the difference between a lifetime mortgage and a retirement interest-only mortgage?
  • How do I know if a retirement interest-only mortgage or equity release is best for me?

If you are interested in a later life lending solution, we hope this guide will help. Our selected advisers are also available to discuss your circumstances and offer further information and advice. Just call us on 0800 096 2215 or request a call back and we’ll arrange a no-obligation appointment for you.

Please note: This article is provided for information purposes only and does not represent financial, mortgage or investment advice. If in doubt, you should seek independent financial advice.

What is a retirement interest only mortgage?

A retirement interest only mortgage, or a RIO mortgage, enables later life homeowners to release some of their property wealth. It is similar to a standard interest-only mortgage, but there are two key differences.

First, there is no fixed end date for the mortgage. This is because the original loan amount does not have to be repaid until you sell your home, pass away or move into long-term care.

Second, when you undergo the affordability checks, you’ll only have to prove you can afford the interest payments each month. Unlike a standard interest-only mortgage, you won’t have to show evidence of how you’ll repay the amount you borrow. This can make it easier to be approved for an RIO mortgage than for a standard interest-only mortgage.

What is an equity release plan?

Equity release enables homeowners aged 55+ to unlock a tax-free cash lump sum from your home to spend however you wish. You don’t have to make any monthly repayments as the interest can be left to roll-up each month. It means you can access the money you need for your later years without having to pay anything extra from your retirement income.

The loan plus interest is typically only repaid when you pass away or move into long-term care. At this point your home will be sold and the proceeds from the sale used to repay your plan. You can still move home when you have an equity release plan, providing your new home meets your provider’s criteria. 

With a retirement interest only mortgage you have to pay the interest every month or you risk losing your home. With equity release, however, you have three main options when it comes to interest on your plan:

  • Make no monthly repayments: You do not have to make any payments towards the interest. Instead, the interest can be left to ‘roll-up’ each month, which means the amount owed will grow in size over time.
  • Make ad hoc payments: If you wish, you can make voluntary payments of the loan capital as and when you want to. These payments can reduce the amount of interest that accrues on your plan. Some providers allow voluntary payments of up to 10% per year penalty free, enabling you to repay your full loan in as little as ten years. 
  • Arrange an interest-only plan: There are also interest-only plans available where you pay off the interest in full every month in the same way that you would with a retirement interest only mortgage. However, with equity release you can stop making these payments at any time and your loan switches to a standard roll-up plan. If you keep up with your payments though, your original loan amount will never increase. 

If you have been thinking about either equity release or interest-only mortgages then contact us on 0800 096 2215 to speak to one of our selected advisers. They can explain everything for you and recommend a product that perfectly suits your needs. Alternatively, check your eligibility and get an initial indication of how much tax-free cash you could unlock

Is a RIO mortgage the same as equity release?

A retirement interest only mortgage is similar to an interest-only lifetime mortgage, but they shouldn’t be confused with each other. 

Yes, they both allow you to unlock a tax-free cash lump sum from your home’s value. You will also pay the interest off every month with a RIO mortgage and have the option to do this with an equity release plan too. However, there is little flexibility with a RIO mortgage: you MUST keep up with your monthly interest payments. 

With an equity release plan, you can choose to stop making your monthly interest payments at any time. For those living on a pension in retirement, inflation and interest rate changes can have a real impact on your disposable income. Having the option to stop making monthly interest payments on your loan at any point can take a lot of pressure off your retirement finances.

What is the difference between a lifetime mortgage and a retirement interest-only mortgage?

Whilst similar at first glance, there are key differences between retirement interest only mortgages and a lifetime mortgage – the most popular type of equity release plan. Here are the main similarities and differences to help you compare these two financial products…

Similarities

  • They both enable you to unlock a tax-free cash lump sum from your home’s value.
  • With both a RIO mortgage and an equity release lifetime mortgage, you are charged interest on the money you release and can pay this in full every month.
  • You have the option to make overpayments with both products – up to a certain amount each year – without incurring penalties. 
  • With both equity release and a RIO mortgage your home will be sold when you pass away or move into long-term care in order for your loan to be repaid.

Differences

  • Affordability checks: When applying for a RIO mortgage, you must pass affordability checks which involve proving your incomings and outgoings. With equity release, there might be no affordability checks to pass. This is because there are no mandatory monthly payments with an equity release plan. You will however need to pass affordability tests if you choose to make voluntary interest payments.
  • Interest handling: With a retirement interest only mortgage, you have to repay the interest every month. If you do not keep up with your payments then your home is at risk. With a lifetime mortgage, however, you can leave the interest to roll up each month until your plan comes to an end. Or, select an interest-only lifetime mortgage and pay the interest each month. If you decide to stop paying the monthly payments your plan will switch to a standard one where the interest rolls up.

How do I know if a retirement interest-only mortgage or equity release is best for me?

Every case is different and assessing the pros and cons of  retirement interest only mortgages vs. equity release for you depends entirely on your individual circumstances and retirement goals. 

When weighing up which option might be the best, interest-only equity release plans arguably offer valuable flexibility that a RIO mortgage cannot. You can stop making interest payments at any time and let the plan switch to a standard ‘roll-up’ plan. Unlike a RIO mortgage, there is no risk of repossession if you choose to stop making your interest payments.

This difference makes the lifetime mortgage a financial lifeline to homeowners who don’t want to commit to keeping up with interest payments on a RIO mortgage. On the other hand, an equity release plan will likely cost more and will reduce the value of your estate. The amount owed can also grow significantly due to the effect of compound interest.  You can read more about the main pros and cons of equity release here.

As we have covered above, there are benefits and drawbacks to both these retirement lending products. Which one is best for you depends on your individual circumstances and your financial goals for retirement. Only a specialist qualified to advise on RIO mortgages and equity release can tell you which would be best for you. Fortunately, we can help with that.

Speak to a later life lending specialist today

Our friendly team can put you in touch with our selected advisers, who are qualified to advise you on RIO mortgages and lifetime mortgages. They can explain everything, clearly and from the comfort of your own home if you wish. 

You’ll be able to discuss your unique wants and needs for later life so they can match you with the best product during your search. If you decide to go ahead, they can arrange everything for you and will keep you updated at every stage of the process. 

Our selected advisers can tell you whether you are eligible for a retirement interest only mortgage or equity release, and which option might work best for you. Call us today on 0800 096 2215 or request a call back and we’ll arrange a no-obligation appointment for you.

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To find out more about equity release or arrange a consultation with an adviser, please call or request a call back and we’ll be happy to help further.

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