What is a retirement interest-only mortgage?

If you want to find out how retirement interest-only mortgages (RIOs) work, then this guide is for you.

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If you want to find out how retirement interest-only mortgages (RIOs) work, then this guide is for you.

If you’re nearing retirement or lucky enough to be retired, you might already be aware that getting a mortgage as an older borrower can be a little more complex.

Lots of homeowners on interest-only mortgages have found this out the hard way, reaching the end of their term without the ability to repay the capital unless they sell their homes. How can those people remortgage to an agreement that allows them to remain in their property?

And let’s not forget about the over 55s who want to borrow more to top up their retirement income. How can they access the funds they want?

Is it harder to borrow on a mortgage if you’re older?

It’s not necessarily a person’s age that can hinder an application. Mortgage lenders tend to focus more on the ability to repay the loan and whether that could be affected in years to come if income takes a dip because of a pension.

That being said, some mortgage lenders do also have an upper age limit for their lending, to ensure borrowers won’t reach a certain age and still owe on their mortgage.

Borrowers over 55 can struggle to meet affordability criteria for standard residential mortgages because of concerns about the ability to repay both the capital and interest of mortgage into their retirement years. before the average mortgage term of 25 years is up.

For example, an applicant may apply at 55 with a stable income of £25,000 a year but at age 66 when they retire, that income could substantially reduce, affecting their ability to repay on time and in full. Furthermore, if they were to apply for the average mortgage term of 25 years, they would need to keep up with mortgage repayments until they were 80.

This, combined with rising house prices means that it can be difficult for some borrowers to borrow the amount they require unless they resort to equity release which can be expensive in comparison to other lending products.

A relatively unheard-of mortgage product could provide a solution, however.

RIO Mortgages: How could one help you?

Retirement interest-only mortgages (RIOs) only require the borrower to prove they can afford the interest on the loan, not the interest and capital - and crucially, there is no mortgage term or ‘end date’.

With no capital repayments, until the borrower passes away or decides to move into residential care or sell up, this type of mortgage can be more financially manageable for those on an income from a pension.

Who is a RIO for?

  • Best suited to older borrowers age 55/60+ depending on the lender
  • People who are approaching the end of their interest-only mortgage term with a capital balance still outstanding.
  • Someone who wants to buy a new property better suited to their needs as they age.
  • A homeowner that wants additional money to top up their income during retirement
  • A parent that wants to gift money to a loved one to help them purchase a property.
  • Homeowners looking to borrow money on a mortgage, benefit from no capital repayments yet pay interest so that when it comes to selling, money might still be left over for children/beneficiaries.

What is a retirement interest-only mortgage?

RIO stands for retirement interest-only. This type of mortgage is a later-life lending product, for over 55s and, unlike standard mortgages, a RIO has no set mortgage term or ‘end date’ because the idea is that the capital of the loan is repaid by selling the house later down the line.

Unlike standard mortgages where the loan repayments are paid over the term of the mortgage date or an interest-only mortgage that has a repayment strategy in place, a RIO mortgage is paid after a ‘life event’

What’s classed as a life event for a RIO mortgage?

While interest payments are made throughout the agreement, the capital repayments are settled via the sale of the house when one of the following ‘life events’ occurs:

  • The last borrower on the agreement decides to move into residential care
  • The last borrower on the agreement passes away
  • The last borrower on the agreement sells the property (perhaps to downsize or just relocate to live closer to family).

How does a RIO mortgage work?

Rather than relying on an alternative investment or savings accounts to pay off the mortgage, like they might with a standard interest-only mortgage, borrowers with a RIO repay their loan by the sale of their home.

For example, two joint homeowners want to move nearer to their children in Dorset. They have a property worth £200,000 and their mortgage is paid but to move, they need an additional £50,000.

They take out a retirement interest-only mortgage of £50,000 at a fixed interest rate of 5%, so monthly they would pay £208 in interest but £0.00 towards the repayment of the amount

they originally borrowed. Their new home is valued at £250,000 when they buy it but that could increase over time.

Many years pass and both homeowners die. Their home is sold for £275,000 and once the capital balance of £50,000 has been paid, there is £225,000 left over for their children to inherit (though this example doesn’t take into account any additional debts the couple may have had secured against their home).

When would I need to repay the mortgage if it doesn't have an end term?

Monthly payments will be required to pay the interest charged for the mortgage and you’ll need to be able to prove you have sufficient income to cover these payments into and throughout your retirement.

The capital of the loan (the amount you originally borrowed) is repaid via the sale of the property after a life event, and this is the only repayment vehicle for a RIO mortgage.

A retirement interest-only mortgage is a long-term financial commitment and while not having to repay the capital of the loan can benefit borrowers, it can reduce the amount of inheritance left to loved ones, once the full balance has been settled

Is the interest rate fixed on a retirement interest-only mortgage?

A RIO mortgage usually has a fixed interest rate for a set amount of years but this varies between lenders.

For example, if a borrower were to take out a RIO mortgage for £100,000 with a 5% fixed interest rate, they would pay £417 each month and then £100,000 at the end of the mortgage term.

These figures would never change unless they remortgaged to another deal with a different rate or new terms

However, some RIO mortgage lenders could have agreements with a two-year fixed rate, of say, 5% but then after this period, the rate reverts to the standard variable rate or SVR. This is usually higher and therefore if you decided to take out this type of contract, your monthly interest repayments are likely to increase.

When you apply for a retirement interest-only mortgage, the lender you choose is legally obligated to tell you about any changes to your interest rate, as well as explain any early repayment fees or costs that you might incur throughout your RIO mortgage

Find a RIO mortgage with a good interest rate

The interest you’re charged for your RIO mortgage affects how much money you pay per month, so it pays to shop around and explore all of your options

A qualified mortgage broker can help you compare the interest rates of the lenders you’re eligible for, saving you the hassle of checking comparison sites which might not always include all of the UK RIO lenders.

Can I make capital repayments on a RIO mortgage?

A RIO mortgage has interest-only repayments. This means your monthly payments will go towards paying off the interest charged and not the money which was originally borrowed.

However, some RIO mortgage providers do allow their borrowers to repay a percentage of the capital each year, though sometimes, early repayment fees may apply.

If you want a RIO mortgage with the flexibility to allow you to repay the capital in the future, ask your mortgage broker to specifically search for this type of agreement.

Pros and cons of retirement interest-only mortgages

Pros

  • If you’re eligible, you can borrow a percentage of the value of your home as a cash lump sum and will be charged only on the interest of the loan
  • It can be more realistic for homeowners to keep more equity in their home for future planning, unlike Equity Release products which usually have no repayments and therefore chip away at the property’s equity.
  • If you already have a standard interest-only mortgage and you have a capital balance to repay, remortgaging to a RIO agreement could allow you to repay that balance and stay in your home during your retirement.
  • Getting a residential mortgage can be more difficult if the mortgage term takes you into retirement whereas a RIO mortgage is designed specifically for older borrowers.
  • The monthly repayments are lower compared to residential mortgages, which can appeal to people planning their retirement.
  • Some borrowers enjoy the peace of mind that comes with knowing their mortgage is in place for life and that unless they want to, they don’t have to remortgage again.

Cons

  • With no capital repayments, the mortgage debt remains outstanding throughout the agreement until it ends, when the borrower, or last borrower, passes away, moves into care, or decides to sell.
  • Interest rates can typically be higher for this type of later-life lending product but that will depend on your chosen lender, their criteria, and your circumstances.

Seek advice from a financial expert and a mortgage broker before securing a debt against your home. Your home may be repossessed if you do not keep up repayments on your mortgage. *

How much can I borrow with a retirement interest-only mortgage?

The amount you can borrow with a RIO mortgage can be up to 50% of the property value but this depends on several factors including:

  • Your current property’s value
  • The amount you wish to borrow
  • The type of property you currently have or are planning to buy
  • Your income
  • The lender’s criteria and terms

Depending on the value of your property and how much you can afford to pay in interest, you could use a RIO to borrow more, perhaps to move to a different property, help family or go on a once-in-a-lifetime holiday or cruis

How the money is spent, is up to you, the borrower

A valuation of your home will be undertaken by the lender before an offer has been made.

One of the most important factors to consider is whether you can afford the interest payments and how that long-term financial commitment could impact your ability to enjoy your retirement.

Whether you decide to go for a RIO mortgage or an alternative later-life lending product, take your time, ask an expert and consider asking a trusted relative or friend to come with you or sit in on the call if you enquire.

Sometimes homeowners consider taking out a retirement interest-only mortgage to help a loved one financially but always consider how that will affect you and the quality of your retirement

What can be included as income for a RIO mortgage application?

Your affordability for a retirement interest-only mortgage is assessed on sustainable income including:

  • Company pension forecast
  • Annuity statement
  • State pension statement
  • Investments
  • Earnings
  • Bank statements
  • Sustainable income from buy-to-let investments

Can I use income from self-employment?

If the income is deemed sustainable then yes, though some lenders may question your ability to generate the same level of income from self-employment into your retirement as you age.

If you plan to work beyond state pension age, some UK lenders will consider your earned income up to the age of 70, and with a handful, that includes income from self-employment.

If the mortgage you’re applying for would extend beyond the date you expect to retire but you’ll have a reasonable level of income in retirement, you may be able to get approved for a RIO mortgage.

Lending criteria does vary so ask a mortgage broker to check your eligibility and then highlight the lenders that are most relevant to your needs.

Am I eligible?

To apply for a RIO mortgage you must be over 50, though some agreements have minimum age requirements of 55 or even 60

Most lenders will require you to have at least 50% equity in your property but again, this varies. Usually, though not always, the more equity you have, the lower the interest rate and crucially, the bigger pool of lenders you have to choose from.

If you are applying for a RIO mortgage with someone else, you will need to prove that you can afford the mortgage on your own if the other borrower passed away.

Furthermore, the property that is secured against the mortgage must be your main residence.

RIO mortgages vs standard interest-only mortgages

A RIO is similar to an interest-only mortgage because the borrower is only required to repay the interest charged on the amount borrowed, leaving the capital (the amount of money borrowed to buy the property) to be repaid later down the line

A key difference though is that a standard interest-only mortgage is repaid at the end of the mortgage term, whereas a RIO is repaid if and when the borrower sells their property, moves into long-term care, or dies.

The property secured against the mortgage (the borrower’s home) is sold to settle the entirety of the loan.

Retirement interest-only mortgage vs equity release

Some people turn to equity release products which can be helpful in many circumstances, but the crucial difference between these two products for older borrowers is that interest accumulates over the span of the mortgage term with equity release, while the interest on a RIO mortgage is paid monthly.

Most equity release agreements have no repayments for interest and capital, a RIO has repayments for interest but no repayments for capital.

This can help some homeowners to leave money for their loved ones, perhaps more so than an equity release agreement as shown in the example below:

RIO mortgage ve equity release example

Let’s say you own a property worth £200,000 and you want to borrow 25% of its value, (£50,000) at a rate of 5%.

Neither equity release nor retirement interest-only mortgages have a specific end date, but in this example, you decide to move into your daughter’s house and sell in 20 years

House prices increase and your home is now valued at £300,000.

Here’s how the maths compares for each later life lending option:

Equity release:

Your monthly repayments: £0

The total value of the loan after 20 years: £185,093

How much is left after repaying the loan: £114,907

The total amount of interest paid: £135,093

Retirement-interest only mortgage

Retirement-interest only mortgage

RIO mortgages vs the alternatives


Retirement interest-only mortgages

Equity release/lifetime mortgage

Standard interest-only mortgage

Length of mortgage term

There is no maximum term so no end date

There is no maximum term so no end date

Typically 25 years but these can range between 5-40 years

Are there capital repayments?

No

No

No

Are there interest payments?

Yes

No

Yes


What happens if I get into financial difficulty during the retirement interest-only mortgage?

A RIO mortgage is secured against the borrower’s property, so if you do fall behind on your interest repayments, you could face losing your home through repossession

This would be the last resort for a mortgage lender who must treat you fairly and ensure that all avenues of repayment have been explored before they proceed with a court-ordered repossession

Tell your lender as soon as possible if you do become unable to repay your retirement interest-only mortgage as they may be able to help you transfer to an alternative and more affordable agreement.

Who offers RIO mortgages?

There are surprisingly more and more lenders in the UK that offer retirement interest-only mortgages as a result of the increasing demand for later-life lending.

Finding the right RIO mortgage lender requires access to the multitude of mortgage lenders and their deals. Information and rates change often and while comparison sites can be a handful for a quick glimpse at who might be able to offer you a RIO mortgage, they don’t always provide an accurate representation for every individual person visiting the site

A mortgage broker takes the time to get to know the people they’re helping, so they can look specifically for lender agreements that are more suitable and therefore, most likely to result in acceptance.

Retirement mortgages with interest payments: Your next steps

The average age expectancy for men is 79.4 years and for women, it’s 83.1 years so it’s no wonder that so many people are seeking out retirement mortgages.

Funding your retirement with a RIO mortgage could help you enjoy your later years, without the worry of large capital repayments. Accessing your home’s equity is a big decision that affects your finance for the rest of your life, so take advice from reviewed professionals that work specifically within the retirement mortgage sector.

If you would like further information on retirement interest-only mortgages or any other retirement mortgage product, feel free to get in touch and we’ll appoint you the right expert

FAQs

My interest-only mortgage is coming to an end, should I get a RIO mortgage?

If your current interest-only mortgage is coming to an end and you’re due to settle the capital balance of the loan, you might be wondering what your options are, especially if you don’t have enough money set aside to clear it

While a retirement interest-only mortgage may provide a suitable solution, you should always consider a range of lending options to find an affordable agreement with terms that work for your situation.

How do I repay a retirement interest-only mortgage?

A RIO is repaid when the borrower sells their property, moves into long-term care, or dies. The property secured against the mortgage (the borrower’s home) is sold to settle the entirety of the loan

Can my state pension be included as income for a RIO mortgage?

Yes.

Do I need to be retired to have a RIO mortgage?

No, you don’t need to have retired to qualify for this mortgage but some lenders do have minimum age requirements, usually ranging from 50-60 years.

What happens at end of a retirement interest-only mortgage?

The loan is repaid by selling the house and any funds leftover are distributed according to the homeowner’s will.

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