If you’re an older borrower wondering how you can access an affordable mortgage deal, you may want to consider a retirement interest-only mortgage (RIO).
These mortgages are typically aimed at borrowers in their 50s and 60s who are approaching retirement.They are usually easier to qualify for than standard interest-only mortgage deals, which typically come with age restrictions for when the debt must be repaid.
RIO mortgages enable you to carry on making interest payments indefinitely, with the loan paid back only when you die or move out. By contrast, a standard interest only mortgage finishes on a specific date and you must repay the capital you owe on this date.
RIO mortgages sit somewhere between a standard interest only mortgage, and an equity release product, and are part of a growing number of innovative offerings from lenders designed for older borrowers. You can find out more about other mortgage options which might be available to you in our article Mortgages if you’re over 50: what you need to know.
Who are retirement interest-only mortgages suitable for?
You may want to consider taking out a RIO mortgage if, for example, you need to extend your interest-only mortgage into retirement as you are unable to pay off the capital you owe by the end of the mortgage term.
Taking out this type of mortgage may be one way you can stay in your home and avoid having to sell up to pay off your mortgage debt in retirement.
Whether you will be accepted for a RIO mortgage is dependent on several factors, with specific criteria varying from lender to lender. Here we look at some of the things you need to consider when thinking about a RIO mortgage, and the advantages and disadvantages of this type of deal.
How retirement interest-only mortgages work
These mortgages are designed for older homeowners seeking to pay just the interest on their mortgage, and do not require a plan for how the capital will be repaid at the end of the term.
An interest-only mortgage can help to significantly reduce monthly repayments, as you only pay the interest on your outstanding mortgage balance and not any of the capital back each month. This may be considerably more manageable for those who expect their income to fall when they retire.
Unlike standard mortgages, RIO mortgages have no set term and are repaid only when the property is sold after you die or move into long-term care, with the remaining value of the property forming part of your estate. This is the main difference between a standard interest only mortgage and a RIO mortgage.
The specific terms for RIO mortgages vary widely depending on the mortgage lender. Some, for example. enable you to repay part of the capital alongside the interest, enabling you to leave a greater proportion of your property’s value to family and loved ones when you die.
Some providers offer these mortgages to the over 55s, while others may require you to be older. Depending on the lender, there may also be other requirements. For example, the property may need to be worth a minimum amount, or you may find there is a minimum loan size.
Remember that like standard mortgages, if you don’t keep up with your monthly repayments on an RIO mortgage, there is still the risk of repossession.
How much can you borrow?
As a general rule, with both RIO mortgages and standard interest-only mortgages, you can borrow less than you would be able to with a repayment mortgage, where you also repay some of the capital.
How much you can borrow will depend on the lender and your personal circumstances. Lenders will want to look at your pension and any other income, including your current mortgage payments, to make an accurate assessment of how much they are willing to lend. This is the same process no matter how old you are – but if you are already retired, lenders will typically want to check your private and company pension forecasts, and your state pension entitlement, as part of their affordability assessment criteria.
RIO mortgage deals typically have a maximum 60% loan-to-value (LTV) ratio. This means you need to own at least 40% of your property outright for your mortgage application to be accepted. However, the majority of older homeowners may already have this proportion of equity in their property by the time they reach retirement, and so will usually find a range of RIO mortgage options available to them.
Advantages of retirement interest-only mortgages
- Your monthly repayments will be cheaper than if you have a standard repayment mortgage, as you’re only repaying the interest each month and not any capital.
- As repayments are relatively low, this should make it easier to prove they are affordable when you undergo the affordability assessment.
- You don’t need to demonstrate how you will repay the mortgage at the end of the term, as the mortgage only has to be repaid when the property is sold after you die or if you move into long-term care.
- You may avoid having to downsize to a smaller property to repay your mortgage at retirement.
- You can remain in your home without worrying about how to repay your outstanding mortgage debt in retirement.
- You can continue on an interest-only mortgage deal if you have a current deal that’s coming to an end. Most standard interest only deals require you to demonstrate how you are going to pay back the capital at the end of the term, so have become unobtainable for many.
- Depending on which RIO mortgage you choose, you may be able to repay some capital too, as and when you can afford it, so that you can leave a bigger inheritance when you die.
Disadvantages of retirement interest-only mortgages
- The amount you’ll be able to leave to loved ones as an inheritance may be reduced as the mortgage capital needs to be repaid when you go into long-term care or die.
- The amount you can borrow will depend on your retirement income, which may be lower than your previous income.
- Lenders can be strict about who they offer RIO mortgages to, potentially limiting options for those without a squeaky clean credit record and plenty of equity in their property.
- If you own less than 40% of your property outright, you are unlikely to be able to get a retirement interest-only mortgage.
- You may find it difficult to change mortgage provider in retirement or move home, depending on your circumstances and the deal you have chosen.
- Given the loan amount is fixed, you are exposed to falling house prices where you could end up owning a smaller percentage of your home.
- You are not protected from negative equity caused by falling property prices, when the total value of the borrowing exceeds the value of the property. Although in reality this would require house prices to fall 40%, given the maximum loan to value acceptance of 60%.
How do RIO mortgages differ from equity release?
An equity release plan is a specialist type of mortgage aimed at older borrowers aged 55 and over that enables you to unlock some of the value of your home as a lump sum or regular payments.
However, unlike an RIO mortgage, with equity release you do not usually make any monthly payments. Instead, the interest you owe builds up over time and is paid back, along with the capital sum you owe, when you move into long-term care or die. Equity release is not without risk as interest can build up to eye-watering sums over time, and reduce the value of any inheritance you leave. You can find out more in our guide equity release – what is it and how does it work?
By contrast, a RIO mortgage is more like a traditional interest-only mortgage deal, where you make interest payments to your lender every month to stop them building up over time.
If you don’t have any dependents you want to leave an inheritance for, or enough income to cover mortgage interest payments, then you may decide that equity release is a more appropriate option to access the wealth tied up in your property. However, you must seek professional advice before taking out an equity release plan. You can find an adviser through the Equity Release Council, which is the trade body for the equity release sector.
Which lenders offer retirement interest-only mortgages?
Lenders offering retirement interest-only mortgages are typically building societies. As with any mortgage deal, make sure you compare plenty of offers so you can be certain you’ve found the best option for your individual circumstances..
By way of example, here are some of the current deals available:
|Marsden||2.29%||Fixed to 31/10/22||55%||£998||To 31/10/22||Free valuation & legal work for remortgage|
|Hanley Economic||2.59%||2.20% discount for term||65%||£250||None||Lasting Power of Attorney required or rate increases to 3.09%|
|Tipton & Coseley||3.19%||Fixed to 30/06/23||60%||£999||To 30/06/23||Free valuation & £250 cashback|
|Leeds BS||3.89%||Fixed to 31/10/30||55%||£999||To 31/10/30||Free valuation|
|Source: L&C – 0800 373300 / landc.co.uk|
Here is a full list of lenders currently offering RIO mortgages
- Bath Building Society
- Beverley Building Society
- Buckinghamshire Building Society
- Family Building Society
- Hanley Economic Building Society
- Hodge Lifetime
- Ipswich Building Society
- Leeds Building Society
- Loughborough Building Society
- Marsden Building Society
- Melton Building Society
- Nationwide Building Society
- Newbury Building Society
- Nottingham Building Society
- Mansfield Building Society
- Saffron Building Society
- Scottish Building Society
- Tipton & Coseley Building Society
- Vernon Building Society
Can I remortgage if I have a retirement interest-only mortgage?
Yes, you may be able to remortgage a retirement interest-only mortgage. However, you may face another affordability assessment, particularly if you’re changing lenders or looking to change the size or term of your mortgage. So it depends on what you’re looking for and your personal circumstances.
How do I find out more?
You can read more about the individual RIO products available on the lenders websites listed above. Like any mortgage, one of the biggest challenges is comparing all of the different options and knowing which ones you are likely to be accepted for.
This is where it can help to speak to a fee-free mortgage broker such as London & Country Mortgages or Trussle who can research the various options that may be available to you on your behalf. They’ll also be able to advise which deals may be best for you based on your individual circumstances.
Are you considering a retirement interest-only mortgage, or have you already taken one out? If so, we’d be interested to hear from you. You can get in touch with us via email at [email protected] or post a comment below.