Retirement Interest Only (RIO) mortgages offer an intriguing option if you have reached retirement age and are looking to remortgage your property or to release some of the equity you’ve built up within your home.
If you’ve struggled to meet the lending criteria for other types of mortgages or you’re keen to explore your equity release avenues, our helpful guide will take you through all the key details of the RIO mortgage, allowing you to make an informed decision about this type of financial package.
What is a Retirement Interest Only Mortgage (RIO)?
Once you enter retirement, you can apply for a RIO mortgage on your home. In essence, retirement interest only mortgages are like standard interest only mortgages because each month, you only repay the interest on the loan, not the capital.
However, RIO mortgages and standard interest-only mortgages have a couple of crucial differences. Standard interest only mortgages are usually offered for a set period on time ( 10,15 years etc) whereas a RIO will not have a set time period and is only repaid when you sell the property. It is also far easier to secure a retirement interest only mortgage than a standard interest only mortgage because you need only prove that you can afford the monthly interest repayments.
Key Facts
Retirement Interest Only Mortgages are similar to standard interest-only mortgages, in that you only pay back the interest every month. With an RIO mortgage:
- You need to make monthly payments to cover the interest
- Capital is usually repaid upon the sale of your property
- You need to prove that you can afford the monthly interest repayments.
Who are RIOs for?
Banks and lenders tend to offer RIO Mortgages to their older borrowers. Although there isn’t usually an upper age limit, there is usually a minimum age. You’ll find packages aimed at over 55’s, over 60’s, pensioners and retirees.
A RIO mortgage is available to those who already own a property and can only be taken out on the home you use as your primary residence.
Key Facts
You may be eligible for a RIO mortgage if:
- You are over 55
- You already own a property
- The property is your primary residence
How are Retirement Interest Only Mortgages Repaid?
With a retirement interest only mortgage, only the interest on the loan is repaid each month, not the capital. The balance of the loan is then paid off once the property is sold, for example, if you decide to downsize, if you need to enter care, or in the event of your death.
Some RIO mortgages offer the opportunity to pay back some of the capital, reducing the loan and returning equity to your home. This can be of benefit to those who inherit the property from you. While many choose to repay the mortgage upon the sale of the property, some RIO mortgages offer terms similar to standard mortgages, where a repayment term can be set.
Key Facts
A RIO mortgage is repaid as follows:
- You repay only the interest on the loan each month
- The loan balance is paid off when the property is sold
- Some RIO mortgages allow you to pay back some of the capital and/or change the repayment terms
How much can I Borrow and what are the Borrowing Criteria?
Mortgage lenders will perform an affordability assessment to calculate how much monthly interest you can afford. They will consider the value of your home and the equity you hold within that. The affordability assessment will appraise your monthly incomings, outgoings and the factors that could affect both.
Because these loans are typically taken out when an individual or couple have entered or will be entering retirement, pensions, savings and investments will all be looked out to check that you can keep up with the monthly interest repayments.
This is an interest only mortgage, so a lender will typically offer you a loan that is lower than a capital and interest mortgage product, for example 50% of the property’s value or less. Your lender may offer you more if you’re also willing to pay off some of the capital each month.
Because of the different borrowing criteria, it’s worth discussing your needs with a mortgage expert to help you find the right retirement interest only mortgage.
Key Facts
Borrowing criteria for RIO mortgage:
- Typically borrow 50% of your property’s value or less
- Affordability assessment, monthly incomings and outgoings
- Pensions, savings and investments all taken into account
- Total amount you can borrow is usually less than with a capital and interest mortgage
What are the Advantages and Disadvantages of a RIO?
Weighing the pros and cons will help you decide whether a RIO mortgage is right. Just because you have fewer mortgage options as you enter retirement age doesn’t mean you should be swayed by a product just because you meet the lending criteria.
The advantages of a RIO mortgage are:
- Accessing equity – this type of mortgage offers a route to release equity within your home. Once the money is released, you can spend it how you like, without the restrictions of some other loans.
- Protecting your home – as long you keep up your monthly repayments, you won’t be forced to sell your home until you choose or will only do so in the event of your death.
- Affordable monthly repayments – because you’ll usually only pay back the interest each month, you won’t find the repayment on this type of mortgage as high as other standard domestic mortgage products.
- Easy approval – to prove yourself eligible for a RIO mortgage, you need only demonstrate that you can pay back the monthly interest.
- Value for money – unlike some other equity release products aimed at retirees, RIO mortgages don’t allow interest to accumulate – there is no interest roll-up. In the long run, this can make a RIO mortgage better value for money.
- Inheritance – with this type of mortgage, where you’re paying for the interest on the loan, you’ll help protect the value of the inheritance you plan to leave.
The disadvantages of a RIO mortgage are:
- Eligibility issues – which can arise if your retirement-age incomings are now low. Remember, the amount a mortgage lender will offer you will be calculated using your retirement income which is usually much lower than when you were in employment. You may also fail to meet the lending criteria for the value of loan you desire if you hold only a low equity percentage.
- Reduced equity in your property – ultimately, by taking out a retirement interest only mortgage, you are reducing the amount of equity you own in your property. Since the loan is repaid upon the sale of the house, you will have less money from the sale to spend as you wish or to leave as an inheritance.
- Risking your home – the loan will be secured against your property; therefore, if you fail to pay back the set interest each month, you risk losing your home.
- Reduced inheritance – Since you will own less of the equity in your home, you risk reducing the value of your children’s inheritance
How does a Retirement Interest Only Mortgage Compare to Equity Release?
Both RIO mortgages and equity release packages allow homeowners to access equity within their home, but they are two very different products.
With an equity release product, you will receive a percentage of your property’s value, but you will not be expected to pay back any interest on this. Instead, upon your death or should you need to move into full-time care, the money will be recouped from the sale of your home. Because you’re not making any monthly payment, the interest on the loan mounts up over time. It is added to the loan’s capital once your property is sold.
In contrast, as you’ve already seen, though the sale of your property pays off the capital of the RIO mortgage, you’ll also be required to make monthly interest payments, ensuring that debt doesn’t accumulate in the same manner.
Although you have the benefit of not having to find the money each month for a monthly repayment with an equity release package, you’ll usually end up spending more on the same value of loan compared to a retirement interest only mortgage. You’ll also experience a more significant loss in the value of your property, leaving less for you or what you plan to leave your loved ones.
| RIO Mortgage | Equity Release |
| Access equity within your home | Access equity within your home |
| Repay the loan interest every month | No interest to repay |
| Interest does not build up over time | Interest accumulates over time |
| Loan amount paid back from the sale of your home | Loan + accumulated interest paid back from the sale of your home |
| Usually results in more money being left to your loved ones | usually end up spending more on the same value of loan |
Comparison
To compare the two products, if you owned a three-bedroom home in Ashford valued at £400,000, you could take out either an equity release or RIO mortgage to the value of 50% of this property at 5% interest. Assume that after fifteen years your home has increased in value to £500,000, and you decide to sell your home to move into care.
With an Equity Release product:
- You would have no monthly repayments.
- Your loan value after fifteen years would be £422,740.
- After the sale of your property and the recouping of the loan, you would receive £77,260.
With a Retirement Interest Only mortgage:
- Your monthly repayments would be £834, with the total interest paid being £150,110.
- Your loan value after fifteen years would be £200,000.
- After the sale of your property and the recouping of the loan, you would receive £300,000.
Questions to Ask when Considering a Retirement Interest Only Mortgage
Making sure you find the best mortgage product during your retirement can be helped by asking a lender the right questions. For a RIO mortgage, these include:
- What happens to a RIO mortgage if I die?
Once all named parties on the mortgage have died or moved into full-time care, your home will be sold. The lender will retrieve the amount outstanding on the loan.
- Are there fees associated with a retirement interest only mortgage?
You may need to cover an arrangement fee, the cost of a survey and valuation, and there may be a completion fee. Though costs vary from lender to lender, it is a good idea to budget up to £3000 to cover every eventuality. Remember to also factor in the expense of your own solicitor.
- What happens if I find myself unable to pay back the monthly repayments?
Assessing your loan’s affordability is an essential step in obtaining a RIO mortgage, but sometimes circumstances can change unexpectedly. If you find you’re no longer able to meet the monthly interest repayments, your mortgage lender can use their right to sell your home to recoup their loan. Alternatively, you may be moved to a different type of mortgage which will allow the lender to roll up the interest and reclaim it upon the later sale of your home.
- Can I sell my home while I still have a RIO mortgage?
Yes, although these loans can be paid off upon the sale of your home in the event of your death or move into care, they can also be paid off because you choose to sell your home for another reason. If you wish to downsize or move in with a family member, the same steps can be taken, ensuring the lender is repaid.
Finding the Best RIO Mortgage Rates
RIO mortgage rates will be influenced by the loan-to-value (LTV) ratio, that is, the size of the loan in relation to the actual value of your property. The higher the LTV, the greater the risk to the lender, meaning the higher the interest rate offered to you.
Although they’re still a relatively new product, plenty of traditional mortgage lenders (such as banks and building societies) are now offering these packages alongside specialist lenders.
Lenders may offer you fixed or tracker interest rates. You need to think carefully about which option best suits your retirement finances and the reality of decreasing savings. Though you may like the predictability of a fixed rate product, if your incomings are healthy, you may like the potential for savings on your monthly interest repayment provided by a tracker mortgage.
Key Facts
How to find the best RIO mortgage rates:
- RIO Mortgage rates influenced by LTV
- Shop around to find the best rate
- Fixed and Tracker rates are available
Get expert advice about RIO mortgages
Consulting a mortgage expert may be your simplest path not only to finding the right mortgage but to securing the most competitive RIO mortgage rates. At DWG Mortgages, we can access mortgage rates and products that aren’t accessible to members of the public through the standard lenders.
If you’d like to find out how to remortgage your Kent property and release useful equity, get in touch with one of our mortgage experts today. Specialising in later life lending, DWG Mortgages is well-placed to find you a competitive retirement interest only mortgage.
Call us today on 01795 608 042
Or email to request a callback – info@dwgmortgages.co.uk
Disclaimer. If you are considering an equity release mortgage it is important to consider the following points. We always recommend that you seek financial and legal advice first.
- An equity release mortgage may affect your rights to means-tested state benefits.
- You risk reducing the value of your children’s inheritance.
- If you give some of the money from the equity release to your children, they may have to pay Inheritance Tax in the future.
- For a lifetime mortgage the interest accumulates daily, impacting the equity on your home.
- Remember a lifetime mortgage is secured against your home. You should always think carefully before securing a loan against your property.