Retirement interest-only mortgages (or RIO mortgages) are an increasingly popular option for homeowners approaching retirement who want to stay in their homes but reduce their monthly mortgage costs.
With a RIO mortgage, you only have to pay the interest on your loan each month, rather than both capital and interest as you would with a standard residential repayment mortgage. The capital is only repaid once you die or move into long-term care, usually from the proceeds of selling the property.
It goes without saying that a unique product like this comes with a very particular set of pros and cons. In this article, we’ll take you through the main advantages and disadvantages of a RIO mortgage to help you decide whether it might be the right option for you.
What are the advantages of retirement interest-only mortgages?
The most obvious benefit of a RIO mortgage is that the monthly repayments are cheaper, because you are only making interest payments and not capital payments each month. This will mean much less coming out of your retirement savings each month, enabling you to spend more of your money as you please.
Some RIO mortgages allow you to make capital repayments if you want to, reducing the amount that needs to be repaid at the end of the term. This means that you would be able to leave a bigger inheritance behind. RIO mortgages have other benefits too, including:
You don’t have to plan how to repay the capital you owe
Because a RIO mortgage term is indefinite – that is, it only ends when you die or enter long-term care – you are not expected to prove how you will repay the capital you owe, as you would with a normal interest-only mortgage. If you have a standard interest-only mortgage coming to an end, you may be able to switch onto a RIO mortgage if you don’t have funds available to repay the capital you owe. Find out more in our guide How do I pay off my interest-only mortgage?
Many people over 50 are put off applying for new mortgage deals because they think providers will turn them away due to their age. However, there is a wide range of options available to homeowners in their 50s and 60s, which you can read more about in our articles Mortgages for over 50s: What you need to know and Mortgages for over 60s: what you need to know.
You can avoid having to downsize or move home
Many people worry that retirement will mean having to downsize or move house, particularly if their retirement income is going to be lower than their salary while employed, or if they currently have an interest-only mortgage but won’t be able to repay the capital owed by the end of the mortgage term. A RIO mortgage can help homeowners to stay in their properties, without them having to worry about having to pay back a big lump sum in future.
You won’t be affected by compound interest
Compound interest is effectively when you pay interest on top of interest – this can happen if an interest payment from a previous period is not made, so interest builds both on the capital as normal and on the unpaid interest on top. Interest can build up very quickly this way and make paying off a loan much more difficult. Because RIO mortgages are designed so that the customer pays off the interest each month, compound interest will not be an issue as long as you keep up with repayments.
What are the disadvantages of retirement interest-only mortgages?
RIO mortgages are designed to last for the rest of your life or until you move into care, so it may be difficult for you to change mortgage providers or move house in retirement if you change your mind. RIO mortgages tend therefore to be best suited to people who are confident that they will not want to move for the rest of their life. Other potential drawbacks of RIO mortgages include:
Your estate will be smaller
The way that RIO mortgages are set up basically means that you are sacrificing some of your future estate to fund your retirement. The capital you owe will need to be repaid when you die or move into long term care, which will reduce any inheritance you leave to loved ones. Make sure that your immediate family is aware of any financial arrangements you have made to avoid disputes or stress in the future.
It can be difficult getting your application accepted
There are various affordability criteria you need to fulfill in order to be accepted for a RIO mortgage, and it’s not always easy to prove you’ll have a stable income in retirement. You can find out more about this in our guide How can older mortgage borrowers prove their income?
It can be especially tricky to get a RIO mortgage if you are applying jointly with a partner, as lenders will want to see that each partner would be able to afford to cover monthly interest payments on their own in the event that one of them dies.
Lenders will also probably not accept you for a RIO mortgage if you own less than 40% of the property outright or your credit history is less than perfect. Read our article 10 biggest credit score myths busted to learn more about how credit scores work.
Your payments will be higher after the introductory period ends
The interest that you repay on your RIO mortgages will typically be a fixed or discounted rate for the first few years as part of an introductory deal. After this, however, you will usually be moved onto your lender’s standard variable rate (SVR), which is normally higher. In other words, your monthly may increase by a fair bit a few years into your RIO mortgage, and stay that way for the rest of the term unless you remortgage to another RIO mortgage deal.
You won’t have any protection against falling house prices and negative equity
If the value of your property falls during the mortgage term, selling the property may not be enough to pay off the capital at the end. This is known as negative equity, which occurs when the market value of the property ends up being less than the amount you owe on it. Should this happen, the balance of the remaining loan will still need to be repaid, possibly from your savings or estate.
Unlike equity release products, RIO mortgages do not tend to include a “no negative equity guarantee”, which provides protection that you won’t have to pay more than the value of the property, even if it ends up being worth less than the outstanding loan. Read more in our article What is negative equity and what you can do about it?
If you’re still not sure…
You can learn more about the ins and outs of RIO mortgages – and the differences between these and lifetime mortgages – in our articles How retirement interest-only mortgages work and What’s the difference between a lifetime mortgage and a retirement interest-only mortgage?
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 somewhere to start, you can speak to a Rest Less Mortgages advisor and get high quality advice on residential, retirement interest-only, equity release and buy-to-let mortgages.
There’s no right or wrong answer when it comes to either moving or improving. The right decision for you will depend not only on what’s possible with your existing home, but also on the reasons you’re contemplating a move.
Often a move is not just about the property itself, but a change in lifestyle or location, which staying in your current home won’t help with. However, sitting down and crunching the numbers, as well as thinking about the logistics involved in each may make it easier for you to decide the best course of action for you based on your individual circumstances.
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