Retirement Interest Only Mortgages

If you’re aged 50 or over and are having difficulty remortgaging, a retirement interest-only mortgage may be an option. 

Remortgaging can become increasingly difficult as you get older, especially if you’re at or near retirement as the lenders will most likely just be focused on your “earned income” that you earn from your “9-5” job to be able to support the mortgage in full. 

Though you may be comfortable with the payments, the lenders have to underwrite your application based on the worst-case scenario “stress tests” where they consider your mortgage rate many times higher than you’re actually likely to be paying and ensure at that level the mortgage is still affordable. Additionally, they’re going to want to see that typically this mortgage is repaid before you reach a certain age, typically 68 or 70 which with all the above calculations can mean the lender is unable to lend you what you need. 

Retirement interest-only mortgages therefore can be a way to unlock some of the value of your home, in a similar way to an equity release scheme and assist you with remortgaging and releasing equity and/or remortgaging your current home. 

What is a retirement interest-only mortgage?

Retirement interest-only mortgages, also called RIO mortgages, have two main uses. Firstly, they can be used by older borrowers who might struggle to meet the lending criteria for other “traditional” mortgage types. The general principle is the same as a standard interest-only mortgage – you take out a loan against the value of your property and only repay the interest each month, not the capital of the loan itself.

The main difference is that a RIO mortgage is usually only repaid when your property is sold. This might be when you die, or when you move out of your home into long-term care. If it’s a joint mortgage, the terms apply to both borrowers, so you won’t need to sell if your partner dies or moves into care. 

However, to be eligible to apply for the RIO mortgage it must be affordable on the lowest-earning surviving party, so in the event of death of the highest earner/ borrower, the mortgage continues to be affordable to the surviving borrower; if applied in joint names.  

Because of the way a RIO mortgage is repaid, it’s typically more likely to get one of these than a standard interest-only mortgage, where there is usually a set date the mortgage term must end. All you need to do is evidence that you can afford the monthly interest only payments.

What’s the difference between a RIO mortgage and a lifetime mortgage?

The Retirement Interest Only (RIO) mortgage is very similar to a lifetime mortgage, in that a RIO mortgage is often used as a form of equity release. However, there are some key differences to consider:

• A RIO mortgage always involves paying off the interest as you go. You have this option with a lifetime mortgage, but you can choose not to (in which case the interest compounds instead).
• RIO mortgages may be available from a slightly younger age (as young as 50)
• The application process is slightly more stringent than with an interest roll-up lifetime mortgage, as you need to prove you can afford the interest payments each month.

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How does a RIO mortgage get paid off?

Unlike a traditional mortgage with a set term end date, a Retirement Interest Only mortgage doesn’t have a fixed term. You make interest payments every month, but the full loan amount is only repaid when the property is sold.

It’s worth noting that some lenders will allow you to make capital repayments as you go. This can be handy if your financial situation changes and you want to reduce the size of your loan, and by doing so lower your interest payments.

What are the advantages of a RIO mortgage?

• With retirement interest-only mortgages, generally all you need to do is prove you can meet the monthly interest payments from your retirement income such as your pension and/or investments.
   
• Smaller monthly repayments mean less drain on your income. As the loan term isn’t fixed, you also don’t need to worry about paying it back after a certain period.
   
• RIO mortgages share similarities with equity release schemes like lifetime mortgages – some of which don’t require you to make any monthly repayments. Instead, they ‘roll up’ the interest, but this means the amount you owe can quickly grow. With a retirement interest-only mortgage the interest doesn’t accumulate, so they can work out much cheaper in the long run; as your equity isn’t eaten up by the compounding interest.
   
• Taking out a retirement interest-only mortgage can provide extra funds for your retirement, allowing you to refinance your retirement property, or gift money to friends and family.
   
• As you’ll be paying off interest on the loan as you go each month, you’re more likely to have some equity eft to leave to your loved ones following your death or when you go into long term care.

What are the disadvantages of a RIO mortgage?

• You need to prove to the lender that you’ll be able to meet the monthly interest payments. If this is a jointly owned property and therefore joint mortgage the lender will have to work out if the mortgage is affordable of whichever borrower has the lowest income. This is so in case if the party to the mortgage with the highest income was to pass away, the mortgage interest payments would continue to be affordable to the surviving party.
   
• As the loan will be repaid from the sale of your home, the amount of money you can leave to your family may be reduced, similar to other equity release arrangements as you’re using the equity in your home.
   
• The loan is secured against your property, so failing to make the agreed monthly repayments in theory could mean in a worst case scenario, losing your home. However, in practice in this situation you would probably have the option of moving to an interest roll-up (lifetime) mortgage, with no monthly repayments but a higher amount to repay at the end. 

How much can I borrow with a RIO mortgage?

How much you’re allowed to borrow will depend on the lender’s affordability assessment, and on the total value of your home. This covers more than just your income. Personal and living expenses will be taken into account, along with factors that could affect your income and impact your ability to make repayments.

FAQs on Retirement Interest only mortgages

If you die? What happens to the mortgage?

Once all the borrowers named on the mortgage have died, the property will be sold and the funds will be used to settle the outstanding loan in full. This generally also applies once all the mortgage holders have moved into long-term, care if this occurs earlier.

What happens if I want to move house?

If you decide you’re ready to sell and downsize to a smaller property, any outstanding loan will be settled using proceeds from the sale. You can also remortgage a Retirement Interest Only (RIO) mortgage, but this could involve another affordability assessment if you need a bigger loan or switch providers. You might also be able to transfer the mortgage to a new property – a process known as porting. Be aware that early repayment charges might apply depending on your situation.

What are the costs of a retirement interest-only mortgage?

Fees vary between products and mortgage providers, but you should budget to spend between £1,000-£3,000. You may have to pay an arrangement fee, survey and valuation fees, and a completion fee. You’ll need a solicitor to act on your behalf (who is specially licenced in RIO transactions) as well as advice from a mortgage broker. You’ll almost certainly find some lenders offering fee-free and cashback deals and your mortgage advisor will be sure to explore the full range of products available to you.

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