With a growing range of mortgage and equity release options available for borrowers aged 55 and up, it’s not always easy to work out which one might be right for you.
Here, we explain how retirement interest-only mortgages and equity release work and examine their similarities and differences, to help you decide whether either option might be worth considering.
What is a retirement interest-only mortgage?
Retirement interest-only (RIO) 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. However, you’ll usually need to own a decent chunk of equity in your property to qualify.
An interest-only mortgage can help to significantly reduce monthly repayments, as you only pay the interest on your outstanding mortgage balance each month and none of the capital. This can make a big difference to the financial picture faced by those who expect their income to fall when they retire. A major potential benefit of a retirement interest-only mortgage is that you don’t have to worry about finding the cash to repay the capital you owe at the end of the mortgage term, unlike a standard interest-only deal. The capital only has to be returned to the lender when you die or move into long-term care, or the property is sold.
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 don’t have a repayment strategy in place to pay off your mortgage capital by the end of the mortgage term.
Many retirement interest-only mortgages come with flexible features. For example, some enable you to repay part of the capital alongside the interest, which means you can leave a greater proportion of your property’s value to family and friends when you die. Find out more about RIO mortgages in our guide How retirement interest-only mortgages work.
It’s not always easy to work out whether a RIO mortgage is right for you, or whether you might be better off with a different type of deal, so if you’re in any doubt, seek professional mortgage advice.
What is equity release?
The most popular type of equity release scheme is known as a lifetime mortgage, and it enables you to unlock some of your property wealth whilst continuing to live in your home. Unlike a standard mortgage and a retirement interest-only mortgage, you do not need to make any monthly payments. Your debt only has to be repaid when you die or go into long term care.
However, as you usually won’t be paying back the interest you owe each month, it compounds over the years. This means it is charged on both the amount borrowed and also the previous interest due, so the total amount owed can grow quickly and eat up a large part of your property’s value over time.
Provided you take out a lifetime mortgage with a provider who is a member of the Equity Release Council, the industry trade body who sets certain minimum product standards, you (or your beneficiaries) will never have to pay back more than the net sale proceeds of your property. This is known as a ‘no negative equity guarantee’.
When you die or move into long-term care, your lifetime mortgage provider will normally expect your home to be sold and any proceeds from the sale will be used to pay off the loan and any interest that has built up. Anything left after the loan has been repaid will remain the property of you, or your estate.
What are the main similarities between a retirement interest-only mortgage and equity release?
There are several similarities between retirement interest-only mortgages and lifetime mortgages, but they have their differences too. Some of the main similarities include:
- They enable you to stay in your home
Both these types of mortgage can provide homeowners with a way to stay in their home and avoid having to sell up to pay off their mortgage debt in retirement.
- They have no set term
Unlike standard mortgages, RIO mortgages and lifetime 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.
- You’ll need to meet certain eligibility requirements
Both RIO mortgages and lifetime mortgages are usually aimed at homeowners aged 55 or above, although the specific terms for both types of scheme vary widely depending on the provider. For example, the property may need to be worth a minimum amount for you to be eligible, or you may find there is a minimum loan size.
- Both enable you to repay the interest you owe
With a retirement interest-only mortgage, you have to pay interest back each month. Whilst you aren’t required to do this with a lifetime mortgage, many of these products allow you to repay the interest on your loan to avoid it accumulating over time. Making voluntary penalty free part repayments was made a compulsory feature for all equity release products that meet Equity Release Council standards from 28 March 2022, and importantly doing this stops the amount you owe building up over time.
- Both of these mortgages can be used to buy property
Retirement interest-only mortgages and lifetime mortgages can be used to buy property too – they don’t just work for a property you already own.
What are the main differences between a retirement interest-only mortgage and a lifetime mortgage?
There are several key differences between retirement interest-only mortgages and lifetime mortgages. These include:
- Monthly payments
When you take out a retirement interest-only mortgage, you make monthly payments to pay the interest you owe. If you don’t keep up with your monthly interest repayments on an RIO mortgage, there is still the risk of repossession, in the same way there would be with a standard mortgage.
With a lifetime mortgage, however, you don’t have to 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. As previously mentioned, equity release plans taken out since March last year allow you to make repayments if you want to, to help reduce the amount of interest that’s payable when the property is sold.
- The amount you’ll end up owing
As you don’t usually repay any of the interest with a lifetime mortgage, and this interest is compounded, it can build up to significant sums over time.
With a retirement interest-only mortgage, you’ll make interest payments indefinitely, so when you die or move out and your loan has to be repaid, there will be less to pay than if you’d opted for a lifetime mortgage. This means you may have more left in your estate for your heirs.
- Affordability assessments
When you apply for a retirement interest-only mortgage, your lender will require you to undergo an ‘affordability assessment’ to check that you’ll be able to afford your monthly interest payments. You’ll still need to pass their particular criteria to be accepted for one of these deals, so depending on your circumstances, a retirement interest-only mortgage may not be an option.
An affordability assessment isn’t required if you apply for a lifetime mortgage, though, as you won’t have to pay anything back until the property is sold.
A lifetime mortgage, along with other equity release products, are high risk and won’t be right for everyone. As a result, current rules from the financial services regulator the Financial Conduct Authority (FCA) require you to speak to a qualified financial advisor before you are able to take out an equity release product to ensure that it is suitable for your circumstances. This is to ensure that you fully understand the long term implications of taking out an equity release product. An adviser will also be able to tell you how much your lifetime mortgage is likely to cost. You can also use our lifetime mortgage calculator to give you a rough guide to the sorts of costs you might face.
If you’re looking for somewhere to start, you can get expert advice from a Rest Less Mortgages equity release specialist. They are active members of the ERC and can advise on equity release mortgages from the whole of the market. They’ll listen to your needs and talk you through your options, so you can decide if equity release is the right option for you.
It’s also a good idea to speak to a broker about retirement interest-only mortgages too, although unlike with a lifetime mortgage it’s not a requirement that you do. Bear in mind that not all brokers who advise on this type of mortgage are professionally qualified to advise customers on equity release options. This means that they might not be able to compare equity release and RIO mortgages to help you decide which is right for you.
Bear in mind that there may be other options available to you that might be more suitable than equity release or a retirement interest-only mortgage, depending on your circumstances.
You can find out more about other mortgage options in our article Mortgages if you’re over 50: what you need to know and Mortgages for over 60s: what you need to know.
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