Retirement interest-only (RIO) mortgages have grown in popularity over recent years, as more homeowners in their 50s and 60s are seeking more affordable mortgage options amid rising living costs.
This type of mortgage is designed for borrowers aged 55 or over who want an interest-only mortgage with no specific end date. Read more in our article How retirement interest-only mortgages work.
There are still plenty of misunderstandings about retirement interest-only mortgages. Here, we look at some common myths surrounding this type of mortgage, and how you can find out whether one might be suitable for you.
Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage. If you’re looking for expert mortgage advice, you can speak to an independent mortgage broker with Unbiased. Every advisor you find through Unbiased will be FCA-regulated, qualified and unconnected to product providers – so they can offer you truly unbiased advice.
Contents
- Myth 1: I must be retired to take out a retirement interest-only mortgage
- Myth 2: They are the same as equity release products
- Myth 3: I need a repayment plan
- Myth 4: I won’t be able to move home with a RIO mortgage
- Myth 5: I won’t leave any inheritance to my loved ones when I die
- Myth 6: I won’t qualify for a RIO mortgage
- Myth 7: I won’t be able to borrow enough
- How do I find out more?
Myth 1: I must be retired to take out a retirement interest-only mortgage
You can apply for a retirement interest-only (RIO) mortgage when you’re in your 50s or 60s, and you don’t need to be retired or even partially retired to do so. Most lenders only offer RIO mortgages to the over 55s, but some have a lower age limit of 50.
The mortgage term will usually run well into your retirement years, provided you can continue making interest payments using your pension income. This gets around the age restrictions that standard mortgages usually have that state you must pay off your mortgage by a certain age, which usually ranges from 70 to 85.
You carry on making payments indefinitely, with the loan usually only repaid when you die or move out of your home. By comparison, you must repay the capital you owe by a specific date if you have a standard interest-only mortgage.
Myth 2: They are the same as equity release products
It’s easy to be confused by the growing range of options for borrowers in their 50s and up. RIO mortgages share some similarities with equity release products, and are part of a growing number of options for borrowers heading towards retirement, but there are significant differences too. Read more in our article Mortgages if you’re over 50: what you need to know.
Equity release enables you to unlock some of the value of your home while continuing to live there, and you don’t need to make any monthly payments. Your debt compounds over the years, and is only repaid when you die or go into long term care. You can find out more about equity release in our guide Equity release – what is it and how does it work?
By contrast, you make monthly interest-only payments if you have a RIO mortgage. However, both equity release products and RIO mortgages enable you to stay in your home, don’t have a set term and come with certain eligibility criteria to apply. Read more in our article What’s the difference between a lifetime mortgage and a retirement interest-only mortgage?
If you’re looking for somewhere to start, you can get expert advice from an independent equity release specialist with Unbiased. 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.
Myth 3: I need a repayment plan
Unlike a standard interest-only mortgage, you don’t need to consider how you’ll repay a RIO mortgage at the end of the term, as the balance only has to be repaid when the property is sold after you die, or if you move into long-term care. The remaining value of your property will form part of your estate on death.
These mortgages are unique, as not only do you just repay the interest on the mortgage, you also don’t need a plan for how the capital will be repaid at the end of the term. As they are interest-only mortgages, your monthly payments will be much lower than on a repayment mortgage, as you’re only paying the interest on your mortgage balance, and none of the capital each month. If your income falls when you reach retirement, this can help you to manage cash flow.
Myth 4: I won’t be able to move home with a RIO mortgage
If you want to move house and take your RIO mortgage with you, you can usually transfer your balance to another property, provided you still meet the lender’s affordability criteria, as you effectively have to reapply for the mortgage again. You do this by selling your property, repaying your existing RIO mortgage and taking out another mortgage on the day you buy your new property.
However, people often take out a RIO mortgage because they want to avoid moving. The idea is you can remain in your own home without worrying about your outstanding mortgage, although this doesn’t mean you are definitely unable to move if you want to do so.
Myth 5: I won’t leave any inheritance to my loved ones when I die
If you take out a RIO mortgage, the amount that you’ll be able to leave loved ones as an inheritance may be reduced, as the mortgage must be repaid from the sale proceeds of the property when you pass away or move into long-term care. However, hopefully you may still have a chunk of equity in your property once your RIO mortgage is repaid, and depending on which RIO mortgage you choose, you may have the option to repay some of the capital alongside the interest during the mortgage term if you want to.
It’s a good idea to discuss the different RIO mortgages available to you with a mortgage broker, and make sure you choose the right product for you if you want to repay some of the capital during the mortgage term, enabling you to leave a bigger inheritance when you die.
Myth 6: I won’t qualify for a RIO mortgage
Like any mortgage application, whether or not you secure a deal will depend on your personal circumstances, and all lenders apply their own criteria when assessing your suitability. Certainly, it’s the case that lending criteria for RIO mortgages can be strict, but that doesn’t mean you won’t qualify. Besides, as your interest-only mortgage payments will be relatively low, this should in theory make it easier to prove they’ll be affordable when you’re assessed by the lender. Remember, too, that you don’t need to show how you will repay the mortgage at the end of the term.
If you own less than 40% of your property outright, you may not qualify for the best RIO mortgage rates. These deals typically come with a maximum 60% loan-to-value (LTV) ratio. However, given the majority of homeowners in their 50s, 60s and beyond usually have a substantial proportion of equity in their property, you may find you have a wide range of RIO mortgage options to choose from.
Myth 7: I won’t be able to borrow enough
While you may be able to borrow less than you would with a repayment mortgage, there’s every chance you can still borrow the amount you need. However, the amount you can borrow depends on your lender and your personal circumstances.
Bear in mind, though, that if you’re already retired, the amount you can borrow will depend on your retirement income, which may be lower than your previous income. The lender will consider your private and company pension values, forecasts, and your State Pension entitlement, in their affordability assessment.
How do I find out more?
Like any mortgage, one of the biggest challenges with RIO mortgages is comparing all of the different options and understanding which deal may be most suitable for you.
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.
If you’re looking for expert mortgage advice, you can speak to an independent mortgage broker with Unbiased. Every advisor you find through Unbiased will be FCA-regulated, qualified and unconnected to product providers – so they can offer you truly unbiased advice.
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