If you are over 55 and looking for a way to stay in your home, reduce your monthly mortgage payments, or release some equity, you may be interested in a retirement interest-only mortgage (RIO). 

According to a survey by Finder UK, the average pension pot in the UK for all British citizens (both retired and non-retired) stands at just £42,651, which is far below the amount needed to fund a comfortable retirement.¹

This shows the importance of planning ahead and finding the best way to make your money last in later life.

At EveryInvestor, we aim to provide you with helpful and impartial information on equity release and alternatives to equity release in the UK based on our research and experience.

We aim to simplify complicated topics so you can make informed decisions about your retirement finances.

Retirement interest-only mortgages and what they can offer you:

What Is a Retirement Interest-Only (RIO) Mortgage?

A retirement interest-only mortgage is a mortgage that allows you to borrow against your property and only repay the interest (and not capital) each month. 

Unlike a standard interest-only mortgage, which has a fixed term and requires you to repay the loan at the end, an RIO mortgage has no set end date and continues until you pass away, move into long-term care or sell your property. 

This means you do not have to worry about finding a lump sum to repay your mortgage when you retire; however, it also means that your heirs may inherit less.

RIO vs. Lifetime Mortgages: What’s the Difference?

The main difference between a RIO mortgage and a lifetime mortgage is that with a RIO mortgage, you pay the interest each month, so the debt does not accrue. 

This means you retain more equity in your property and can pass on more inheritance to your family.

However…

With a lifetime mortgage, you do not need to worry about making any repayments, which can free up more income for your living expenses.

A lifetime mortgage is a form of equity release that lets you borrow a lump sum or a regular income against your property without having to make any repayments. 

The interest is added to the loan and compounds over time, meaning that the debt can grow significantly over the years. 

Remember…

The loan is only repaid when you pass away or move into long-term care.

The later-life lending market can be complicated, which is why it is vital to obtain professional advice from a financial advisor or broker authorised and regulated in the UK by the Financial Conduct Authority to determine what your best options are.²

Your situation and your financial objectives in the future will have an impact on this.

How Do RIO Mortgages Compare to Other Retirement Options?

Compared to other retirement mortgage options, RIO mortgages offer a unique balance of cost and flexibility.

Unlike standard interest-only mortgages, RIOs do not require the capital to be repaid until you sell your home, enter long-term care, or pass away.

This differs from lifetime mortgages, where the loan and interest accumulate over time, potentially reducing your estate’s value more significantly.

Who Qualifies for a RIO Mortgage, and What Are the Financial Implications?

Individuals over a certain age, typically retirees, qualify for an RIO mortgage, facing financial implications such as monthly interest payments and potential estate reduction.

Who Is Eligible for the Best Retirement Interest Only Mortgages?

People aged 55 or over who own a home in England, Wales, or mainland Scotland are eligible for the best retirement interest-only mortgages.³

In addition, you will need to have a reliable source of income from pensions, savings, or investments, and be able to afford the monthly interest payments. 

Be sure to consider:

You will also need to meet the lender’s criteria for credit history, property type, and loan size.

It is important to note that specific lending criteria can vary between providers and the plans they offer. 

This makes it even more important to consult a professional later-life lending advisor or broker to navigate the intricacies of different plans and find the one that best suits your needs.

What Are the Tax Implications of Taking Out a Retirement Interest-Only Mortgage?

Taking out a retirement interest-only mortgage may have tax implications, particularly on inheritance tax and potential impacts on benefits, requiring careful financial planning.

The loan itself is not taxable, but the way you use the borrowed funds can affect your tax situation.

For instance, if you invest the money or use it to generate income, this could be subject to taxation.

How Do RIO Mortgages Work, and What Are the Rates and Costs in 2024?

RIO mortgages work by allowing only interest payments, with principal due later; in 2024, rates and costs vary by lender, influenced by market conditions and borrower’s profile.

How Does a Retirement Interest-Only Mortgage Work for Over 55s?

A RIO mortgage works like any other mortgage, except that you only need to prove that you can afford the monthly interest payments, not the capital repayment. 

The amount you can borrow will depend on your income, outgoings, age, and property value. 

You can use a RIO mortgage to buy a new home or remortgage your existing one. 

Some RIO mortgages also allow you to repay some of the capital as well as the interest, which can reduce the size of your loan over time and leave more equity for your heirs.⁴

What Are the Retirement Interest Only Mortgage Rates and Costs in 2024?

The costs of a retirement interest-only mortgage, aside from the interest, often include specific fees charged by the provider. 

These may include:

• Application fees
• Valuation fees
• Legal fees
• Product fees
• Arrangement fees
• Broker fees (if you use one)

These fees can vary depending on the lender and the product you choose, so ensure you seek professional financial advice and compare them before applying for an RIO mortgage. 

Remember…

You may also need to pay an early repayment charge if you decide to pay off your RIO mortgage before it ends.

RIO Mortgages for Couples vs. Individuals

For couples, retirement interest-only mortgages often require repayment upon the second partner’s death or move to long-term care, differing from individual agreements where repayment triggers on the first occurrence.

Should one partner pass away or move into long-term care, the surviving partner is not immediately required to repay the loan.

This arrangement allows them to continue living in the home without the immediate financial burden of repaying the mortgage.

In contrast…

For an individual borrower, the RIO mortgage’s repayment is closely tied to their personal life circumstances.

If they move into long-term care or pass away, the loan repayment becomes due. In such cases, the individual’s estate is responsible for settling the debt, usually through the sale of the property.

This scenario emphasises the importance of planning for how the loan will be repaid to avoid financial difficulties for any beneficiaries or executors handling the estate.

What Are the Benefits and Risks Associated with RIO Mortgages?

The benefits of RIO Mortgages include lower monthly costs and home retention, while risks involve potential interest accumulation and impacts on inheritance.

What Are the Advantages of Retirement Interest-Only Mortgages for Pensioners?

Some advantages of an RIO mortgage include reducing your monthly repayments and giving you more financial stability in retirement. 

Other advantages are…

• You can stay in your home for as long as you want, provided that you keep up with your interest payments and meet any other terms and conditions.
• You can reduce your monthly mortgage payments by only paying the interest.
• You can choose from a range of products and interest rates offered by different lenders to suit your needs.
• You can switch to a different product or lender if you find a better deal, depending on your circumstances and eligibility criteria.

What Are the Disadvantages of Retirement Interest-Only Mortgages?

Some disadvantages of an RIO mortgage include that if you default on your monthly payments, you risk repossessing your home. 

Additional disadvantages include…

• You will still need to pay interest every month, which can affect your disposable income.
• You will not reduce the size of your loan unless you make capital repayments.
• You may have to pay fees to set up and maintain the mortgage.
• You may have to pay an early repayment charge if you want to pay off the mortgage before it ends.

As there are so many facets to consider, receiving professional advice is essential. 

Where Can You Find Tools to Compare RIO Mortgages and Make Informed Decisions?

Tools to compare RIO mortgages and make informed decisions can be found on financial comparison websites, lenders’ sites, and through independent financial advisers’ resources.

How Can You Use a RIO Mortgage Calculator to Compare Rates?

To use a retirement interest-only mortgage calculator you will need to enter some basic information, which we will explore in this section. 

It can help you estimate how much you can borrow, how much interest you will pay, and how much equity you may leave in your property with a RIO mortgage. 

The information you will need to enter into a RIO mortgage calculator includes…

• Your age
• Your property’s value
• Your income
• Your outgoings
• The interest rate
• The loan term (if applicable)

You can use different scenarios to compare your options and find the best deal for you.

Importantly…

These calculators are designed to provide you with an approximation based on the information you enter. 

Only a lender can provide you with an accurate quote after considering your unique circumstances and passing their various affordability tests.

Comparing the Best Retirement Interest-Only Mortgage Providers in 2024

In 2024, comparing the best retirement interest-only mortgage providers involves assessing interest rates, terms, customer service, and flexibility to find the ideal fit for your needs.

Several lenders offer RIO mortgages in the UK, each with their own products, rates, and criteria. 

Two of the most popular ones are Leeds Building Society and Nationwide Retirement. 

Leeds Building Society

Leeds Building Society is one of the oldest building societies in the UK and offers RIO mortgages for borrowers aged between 55 and 80.⁷

You can borrow up to 55% of your property value on an interest-only basis, or up to 65% on a capital repayment basis. 

You can choose from fixed or discounted rates, with terms from two to five years. 

Leeds Building Society also offers fee-free products and cashback incentives.

Nationwide Retirement

Nationwide Retirement is a specialist lender that offers RIO mortgages for borrowers aged 55 or over. 

An important note is that it now only offers these products to its existing customers wishing to change plans or borrow additional money.⁸

You can borrow up to 50% of your property value on an interest-only basis, or up to 65% on a capital repayment basis.

You can choose from fixed, variable or tracker rates, with terms from two to five years. 

How Should You Plan Repayment and What Impact Does a RIO Mortgage Have on Inheritance?

Planning repayment for an RIO mortgage should consider the impact on inheritance, as the loan reduces estate value, requiring strategies to mitigate the effects on beneficiaries, as well as assessing rates and repayment terms.

How Do You Pay Off a RIO Mortgage?

You pay off a RIO mortgage when you sell your property, move into long-term care or pass away.

The lender will then claim the loan amount from the proceeds of the sale of your home or from your estate. 

Your beneficiaries will inherit any surplus if present.

How Does a Retirement Interest-Only Mortgage Affect Your Inheritance and Home Equity?

A retirement interest-only mortgage affects your inheritance and home equity by reducing the estate’s value through the repayment of the loan from the property’s sale.

As you pay only the interest, the principal loan amount remains unchanged, preserving more home equity than a typical equity release plan.

This means there is potentially more of your home’s value to leave as inheritance, though the total loan amount will be deducted from your estate.

Are Retirement Interest-Only Mortgages the Best Choice for Over 65s?

Whether RIO mortgages are the best choice for those over 65 or not will depend on personal circumstances, preferences, and future goals. 

A RIO mortgage can be a good idea if you…

• Want to stay in your home for as long as possible.
• Want to reduce your monthly mortgage payments by only paying the interest.
• Want to release some equity from your property to meet your financial goals.
• Want to retain more equity in your property and pass on more inheritance to your family.
• Want to have more flexibility and choice in your later life borrowing.

A RIO mortgage may not be a good idea if you…

• Want to pay off your mortgage as soon as possible.
• Want to avoid paying interest every month.
• Want to maximise your income for your living expenses.
• Want to qualify for means-tested benefits.⁹ 
• Want to qualify for tax credits.¹⁰
• Want to have more certainty and security in your later life borrowing.

You should always seek independent advice before making any decision about your retirement finances.

What Is the Maximum Borrowing for a Retirement Interest-Only Mortgage?

The maximum borrowing for an RIO mortgage will vary depending on the lender, but typically it will be between 50% and 65% of your property value.⁵

Some lenders may even offer up to 75% of your property value.⁶

For example, if your property is worth £300,000, you may be able to borrow between £150,000 and £195,000 with a RIO mortgage.* 

Several factors will determine the exact amount, including your age, property value, and your lender’s affordability assessment.

* The figures provided above are for indicative purposes only. 

What Are the Best Retirement Interest Only Mortgage Rates in 2024?

The best retirement interest-only mortgage rates in 2024 depend on market conditions, the borrower’s financial situation, your loan-to-value ratio, your credit score, and competitive offers from lenders.

You should always check the latest rates and terms with the lender before applying for an RIO mortgage.

What Are the Early Repayment Terms and Charges for Retirement Interest-Only Mortgages?

Early repayment terms and charges for retirement interest-only mortgages vary by lender, often including penalties for early settlement within certain time frames.

These charges can apply if you repay the mortgage earlier than agreed, often as a percentage of the outstanding loan.

It is crucial to understand these terms upfront, as they can significantly impact the total cost if you decide to sell your home or switch mortgage products.

Common Questions About Retirement Mortgages Interest Only

In Conclusion

A retirement interest-only mortgage can be a useful way of borrowing in later life, as it can help you stay in your home, reduce your monthly payments, and release some equity. 

However, it also has some drawbacks, such as reducing the amount of equity in your property, affecting your inheritance plans, and potentially costing more than other types of later-life lending.

You should consider all options available and seek independent advice before applying for a RIO mortgage.

Disclaimer: This article is intended for general information purposes only and does not constitute financial advice. RIO mortgages are regulated by the Financial Conduct Authority (FCA) and may affect your eligibility for means-tested benefits or tax credits. You should always seek independent advice before making any decision about your retirement finances.