Retirement interest-only mortgages

Retirement interest-only mortgages offer a lifeline to older borrowers and can be a cheaper alternative to equity release. Here’s what you need to know.

Angela Kerr Director, Editor

What is a retirement interest only mortgage?

Retirement interest-only mortgages (sometimes called ‘RIO Mortgages’) are home loans aimed at older borrowers who may struggle to get a mainstream mortgage due to age limits.

With retirement interest-only mortgages you repay the interest on your loan monthly, which means the amount you owe doesn’t increase over time. You don’t have to repay the capital until you die or go into long-term care. Then your home is sold, and the lender is repaid from the proceeds.

Another difference between retirement interest-only mortgages and a standard repayment mortgages is you won’t be subject to the same affordability tests. You only have to prove you can afford to repay the interest, not the capital you’ve borrowed.

How do RIO mortgages work?

With retirement interest-only mortgages, you repay the interest on the loan every month. However some lenders will let you pay off capital too.

For an example of how retirement interest-only mortgages work, say you have a property worth £400,000 and you borrow 25% – £100,000 – at a 5% interest rate and you make monthly repayments of £416.

If you go into long-term care in 15 years’, it’s time to repay the debt which will still be £100,000. Assuming your property is now worth £500,000, you would have £400,000 left after the sale of your home. You would have paid £74,880 in monthly interest repayments over the 15 years.

Retirement interest only mortgage vs equity release

If you’re wondering how retirement interest only mortgages differ from an equity release loan (also known as a lifetime mortgage) we can explain. Both are retirement mortgages but the repayment terms differ. The key difference is that with equity release, interest can be rolled up and repaid at the end of the loan, so there are no monthly payments. However, if you do allow interest to roll up rather than repay it, the debt grows as time passes. This can mean, when it is time to repay, there isn’t a lot of money left in your home to pass on in inheritance.

So let’s go back to example above of a property worth £400,000 and you borrowing £100,000 at 5% interest. If you’ve made no monthly repayments, the debt would have grown to £211,370 over 15 years, assuming it is compounded every month. After you’d repaid it, you would be left with £288,630 – compared to £400,000 with the retirement interest only mortgage example.

However, there are some other differences between retirement interest-only mortgages and lifetime mortgages. For example, the application process is stricter with retirement interest-only mortgages because you’ll need to be able to prove you can afford the repayments.

Want to explore your retirement mortgage options? Get fee-free advice on retirement mortgages from our mortgage broker partners at L&C

Why get a ROI mortgage?

There are lots of reasons why people take out retirement interest-only mortgages. These include:

• Paying off an interest-only mortgage: One reason to get an retirement interest-only mortgage is to pay off an interest-only mortgage that has matured.
• Buying a property to let out: If you do this, ideally the rent on your Buy to Let property would cover the RIO mortgage repayments. However, you’ll need to look at the financial side carefully. A good place to start is our rent calculator which tells you how much you could rent out a property for based on your property type, location and local demand.
• Debt consolidation: If you have debts, you may consider take out a retirement interest-only mortgage to release cash from your house to pay them off. Before doing this it’s advisable to get independent financial advice.
• Home improvements: You may want to get a retirement interest-only mortgage to fund improvements to your home if it means you can make changes to your property that mean you can live there for longer. For example, adding a downstairs bathroom or bedroom.
• Helping children or grandchildren onto the property ladder: With retirement interest-only mortgages, you could release some of the equity you’ve built up in your house to give to your children or grandchildren to help them get on the property ladder. Read more in our guide on The Bank of Mum and Dad – How to help your child buy a home.
• Estate planning: While if you have a large estate, you may consider taking out a RIO mortgage to pass on some early inheritance to family members. By reducing the size of your estate in advance means there may be a smaller inheritance tax bill when you die. However, before doing this, make sure you take independent financial advice to ensure you make the best decision for you. Find out more in our guide on How to avoid inheritance tax.

Who can get a retirement interest-only mortgage?

With retirement interest-only mortgages, you’ll need to be at least 50 years old to be able to take one out. Although many lenders require the borrower to be at least 55.

Because they are interest-only, the low monthly repayments could suit you if you are retired but have a regular secure income. For example, from a defined benefit pension.

The lender may insist on you owning a minimum amount of equity and you will also need to meet the lender’s individual lending criteria.

How much can you borrow?

This will depend on a number of factors including your lender’s affordability assessment and on the total value of your home. Your loan to value will also be considered. In general with both retirement mortgages and standard mortgages, you can borrow less with an interest-only mortgage than when you are also repaying the capital. This could mean you can borrow 50% of the value of your home interest-only, but you could borrow 65% if you were repaying the capital too.

How do I get the best interest-only retirement mortgage?

If you’re planning to go down this route then make sure you get the best retirement interest-only mortgage by taking expert mortgage advice. By speaking to an independent broker or independent financial adviser, you’ll be able to discuss all the options so you can decide the best next step for you.

Demand for retirement interest only mortgages has increased in recent years, and there is now a much wider range of options to choose from. As a whole of market mortgage broker, our partners at L&C offer free mortgage advice to help you find the best deal to suit your circumstances. Let them compare the best retirement interest only mortgages on your behalf and explain which deals you’re likely to be eligible for. Once they have found the right mortgage deal for you, they’ll guide you through the application process from start to finish. Click below or call them now on 0800 0732326.

How do you repay a retirement interest-only mortgage?

There are two elements to repaying a retirement interest-only mortgage: the interest and the capital. You repay the interest with monthly payments. The capital is repaid as a result of your house being sold, either when you die or go into long-term care.

Who offers retirement interest-only mortgages?

In 2018 the Financial Conduct Authority (FCA) re-categorised retirement interest-only mortgages out of the equity release sector and into the standard mortgage bracket. This means mainstream lenders could start offering retirement interest-only mortgages.

As a result, more and more providers are offering retirement interest-only mortgages. For help finding the lender who is going to offer you the best deal, we would recommend speaking to a fee free mortgage broker. Get fee-free advice on retirement mortgages from our mortgage broker partners at L&C.

RIO mortgage lenders include:

• Leeds Building Society
• Nationwide
• Legal & General
• Saffron Building Society
• The Family Building Society

Can I get a retirement mortgage?

Banks and building societies will assess a few things before offering you a retirement interest only mortgage.

1. Your age now – you need to be at least 55 to apply for a retirement interest only mortgage.
2. Your age in the future – If you wanted to get a standard mortgage, lenders would assess how old you would be when the mortgage was due to be repaid. With many having a cut off of 75, this can really limit your standard options. But with a retirement interest-only mortgage there is no upper age cut off because you agree that your debt will be repaid from the proceeds of the sale of your home. That will be either be when you die or enter long-term care.
3. Income – you need to be able to prove you have a steady, reliable income that will more than cover the interest repayments on the mortgage
4. House value – Lenders will assess the value of your home and will only lend you a percentage of that amount. You need to have significant capital built up in your home as most retirement interest only mortgage lenders won’t lend more than 50% of the value.

What are the best retirement interest-only mortgage rates available?

When it comes to rio mortgage rates, available rates fluctuate but they’ll also vary by lender and other factors like your LTV too. The easiest way to find out what the best retirement interest-only mortgage rates available are is to speak to a fee-free mortgage broker.

Can I switch to a retirement interest only mortgage?

Yes. It is possible to switch a repayment or interest-only mortgage to a retirement interest only mortgage. However, you may have to pass a new affordability assessment with the bank or building society offering the retirement interest only mortgage.

We would recommend working out what you can afford and reading our guide to making a successful mortgage application before making the switch. That way you boost your chances of being approved.

You should also check if there are and penalties for switching away from your current lender and how much these would be.

How can older mortgage borrowers prove their income?

The bank or building society considering your retirement mortgage application will need to know you can make the repayments. The specific checks will vary between lenders with some accepting different forms of income to others.

If you plan on continuing working beyond the state pension age, some lenders will carry on considering earnings beyond 65.

You’ll also need to provide a company pension forecast, or annuity statement as well as your state pension statement.

Advantages and disadvantages of a retirement interest only mortgage

What are the advantages of retirement interest-only mortgages?

• They avoid you having to downsize in order to release money from your home.
• The loan term is not fixed. So, you don’t have to worry about repaying the capital until you are finished with your home.
• There is no “interest roll-up”. In other words, compounding won’t erode the amount of capital you have left in your house to pass on to your family.
• They are usually cheaper than lifetime mortgages.

What are the disadvantages of retirement interest-only mortgages?

• You need to pass affordability checks to prove you can meet the monthly interest repayments.
• Your home will be sold to repay the capital when you die or enter long-term care.
• If you don’t make your repayments, you put your home at risk of repossession.
• The amount you can borrow will be based upon your retirement income and the value of your home.

How much are retirement interest-only mortgage fees?

Retirement interest-only mortgage fees vary but you may have to pay an arrangement fee, survey and valuation fees, and a completion fee. Plus you’ll need a solicitor to act for you too. Costs can mount up so it’s important to make sure you get the best deal. By speaking to a mortgage broker, they’ll help you compare different deals including the fees charged so that you can make the best choice.

Should I choose a retirement interest-only mortgage?

Whether a retirement interest-only mortgage is right for you will depend on your circumstances. So to find out your options, it’s a good idea to speak to a fee-free mortgage broker who will explain what’s available.

How do I apply for a retirement interest-only mortgage?

With retirement interest-only mortgages, the easiest way to start the process is by speaking to a fee-free mortgage broker. They’ll go over some basic information including how much you would like to borrow and what for. They’ll go through your circumstances in detail and recommend a suitable product and help you with the application process and answer any questions you may have.

How popular are RIO mortgages?

According to the most recent figures, the number of RIO mortgages sold between July and September 2021 rose 97.2% to 761, up from 386 in the same quarter of 2020, according to FCA data.

Frequently Asked Questions