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Your guide to retirement interest only mortgages

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By Clare Yates • 2nd March 2023 • 6 min read

Could a RIO mortgage suit your retirement needs?

If you are in or approaching retirement and your existing mortgage deal is coming to an end, you may be exploring your options. Alternatively, perhaps you’re looking to borrow a cash lump sum after reducing your income in retirement. One product worth considering is a retirement interest only (RIO) mortgage.

To help you decide if this increasingly popular product could be a good fit for you, we explore the following in this article:

  • What is a retirement interest only mortgage?
  • How much could I borrow with a retirement interest only mortgage?
  • How do I pay off a retirement interest only mortgage?
  • Pros and cons of a retirement interest only mortgage
  • How do retirement interest only mortgages compare with equity release?

If you are interested in a RIO mortgage, 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 0808 178 3055 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?

According to the Office for National Statistics, 1.46million over-65s were in employment between April–June 2022, a record level. But that still leaves many millions of people in later life out of employment, and often on a low income. 

This is why retirement interest only (RIO) mortgages can be a useful option for people who may not pass the affordability checks for a standard residential mortgage. 

These are similar to a conventional interest-only mortgage but with two differences:

  • There is no fixed end date. The original loan amount does not have to be repaid until you sell your home, pass away or move into long-term care.
  • Less demanding affordability checks. When you undergo the affordability checks, you’ll have to show that you can afford the interest payments each month – but there’s no need to have a repayment vehicle such as savings or an endowment policy in place.

To find out about your retirement mortgage options speak to our friendly team today. They can connect you to one of our selected advisers who can explain everything you need to know about RIO mortgages and other later-life lending options. Call today on 0808 178 3055 or click here to arrange a free callback.

Why might I choose a retirement interest only mortgage?

There are a number of reasons that you might choose a retirement interest only mortgage over a standard repayment or interest-only mortgage. 

 

“I need to repay an existing interest-only mortgage deal”

For people with interest-only mortgages due to end soon, the prospect of repaying the loan can cause a great deal of worry. According to the Financial Conduct Authority, approximately 40,000 homeowners aged 65+ have interest-only mortgage terms maturing every single year. This trend is set to continue until 2032. 

Worryingly, many people in this situation have no plan in place for repaying their outstanding loan when their term ends. This puts them in the difficult position of having to find a solution quickly or their home could be at risk.

If you can comfortably continue to afford the interest payments each month and are happy to commit to paying them for life, a RIO mortgage might be a good option for you. 

 

“I’m concerned about passing affordability checks for other types of mortgage”

It can often be frustratingly difficult for older homeowners to pass the stringent affordability tests for a later life repayment mortgage, where you pay back the money you borrow in addition to making interest payments. But RIO mortgages can be easier for some people on lower incomes to arrange.

RIO mortgages are typically easier to be accepted for than conventional mortgages. So if you think your age or reduced retirement income might make it difficult to pass affordability checks for other mortgages or loans, a RIO mortgage may be a good alternative.

 

“I want to borrow a cash lump sum against the value of my home”

If you are thinking about unlocking some of the money from the value of your home, you could consider either a RIO mortgage or an equity release plan. Both of these options enable you to access a tax-free cash lump sum from your home to improve your financial situation. You can read more about the equity release option further down in this article.

 

“I want to purchase a home for my retirement”

If you are looking to purchase a bungalow, flat or other retirement property for your later years then you might need to arrange a mortgage to help finance the purchase. You may find that the properties you are looking at are more expensive than your current home, leaving you with a cash shortfall. 

Alternatively, you might already have a small mortgage left on your home but have found that your lender cannot offer you a larger loan due to your age or income. A retirement interest only mortgage could enable you to afford the property that you want. 

How do I repay a retirement interest only mortgage?

A retirement interest only mortgage is typically a lifetime commitment. The capital doesn’t have to be repaid until you sell your home, pass away or move into long-term care. 

When you pass away or move into long-term care, your home will be sold in order for the outstanding capital on your loan to be repaid.

As it is an interest-only product, you make monthly payments to service the interest on your loan. Some lenders offer fixed rates for life, which is great news for homeowners who do not want their monthly payments to be affected by future interest rate fluctuations. 

Variable and capped rates are also available on some retirement interest only mortgages. These will see your rates fluctuate in line with market changes, but can be capped so they won’t rise past a certain amount.

 

Repaying a RIO mortgage early

Some lenders allow you to make overpayments up to a certain amount to reduce the capital over time without penalty. Depending on your lender’s overpayment limits, you could even clear your later life mortgage this way without incurring any early repayment fees.

Some lenders even allow customers to make overpayments of up to 10% per year without penalty. This could see you clearing your retirement interest only mortgage in as little as ten years. If this is something you may want to do, our selected advisers can take that into consideration while searching for the best deal available for your needs. 

How much could I borrow with a retirement interest only mortgage?

The amount you could borrow from your home depends upon your individual circumstances and the lender you choose. Each lender has their own criteria and limits that determine how much they will lend to you. 

Typically homeowners can borrow up to 50% of their home’s value with a retirement interest only mortgage. The amount you can personally borrow will largely depend on your age, income and property value. You can check your property value via the Land Registry search facility, or sites such as Zoopla or Rightmove

For your adviser to establish exactly how much you can borrow with a RIO mortgage, they will carry out an affordability check to assess your income and outgoings. This is to ensure you can comfortably afford the interest payments each month, both now and when you are living on any pensions, savings and investments.

If the affordability checks concern you, or you do not want to commit to making monthly interest payments for life, then an equity release plan may be a better later life mortgage option.

Pros and cons of a retirement interest only mortgage

As with any financial product, there are both advantages and disadvantages to consider before making your decision. To help you decide if one might work for you, here are some of the pros and cons of retirement interest only mortgages:

 

Pros
  • Typically easier to pass the affordability checks than with a standard later life repayment mortgage.
  • You pay the interest off in full every month so your loan will never grow in size.
  • You can unlock tax-free money from your home to spend as you wish, such as topping up your income, paying off another mortgage or loan, or helping loved ones buy a property.
  • You can repay a RIO mortgage early, although there may be early repayment fees depending on the limits set by your chosen lender.
  • You can usually move home with a RIO mortgage providing your new property meets your lender’s requirements. 

 

Cons
  • You will have to show during your application that you’ll be able to afford the monthly interest repayments for the rest of your life.
  • If you choose to repay your retirement interest only mortgage early, or pay more than the overpayment limit set by your lender, you may incur early repayment charges.
  • You can port (move) your deal to a new home, but if your new property is worth less than your current one, you may have to pay back part of your RIO mortgage.
  • If you do not keep up with your monthly interest payments then you risk having to sell your home to repay your loan.

How do retirement interest only mortgages compare with equity release?

Retirement interest only mortgages are very similar to one type of equity release plan in particular, the lifetime mortgage

Both enable you to access tax-free cash from the value of your home, without having to sell or move house. Interest is applied to your loan, but the original loan amount does not have to be paid back until your home is sold when you pass away or move into long-term care.

However, there are key differences which may make one later life mortgage product more suitable for you than the other. To help you compare these two products, take a look at the similarities and differences below:

 

Retirement interest only mortgage
  • When applying for a RIO mortgage, you must pass affordability checks which involve proving your incomings and outgoings. 
  • Unlock a tax-free cash lump sum from your home’s value.
  • Pay the interest in full every month. 
  • You must keep up with your payments or you risk losing your home.
  • Your home will be sold when you pass away or move into long-term care in order for your loan to be repaid.

 

Lifetime mortgage
  • There are usually no affordability checks for equity release plans.
  • Unlock a tax-free cash lump sum OR small amounts over time with a drawdown lifetime mortgage.
  • Paying the interest each month is optional. Either let the interest roll up each month with a standard plan, or pay the interest monthly with an interest-only lifetime mortgage
  • No risk of repossession if you choose to stop making interest payments. Instead, you switch to a standard lifetime mortgage and the interest will start to roll-up each month.
  • Your home will be sold when you pass away or move into long-term care in order for your loan to be repaid.

You can read more about the main pros and cons of equity release here.

Speak to a specialist in later life lending

If you are considering a retirement interest only mortgage or an equity release plan then make sure you speak to our friendly team. After answering your initial questions, we can connect you to a specialist adviser who can advise on both products. 

They’ll be able to answer all your questions, explain which product might be most suited to your needs and search for the best quotations. If you choose to go ahead, they can arrange everything for you, all from the comfort of your home. Call 0808 178 3055 or request a free callback today to get started.

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