The retirement mortgage industry has endless options! And with the new kid on the block launched in 2018, now you have even more later-life mortgage plans to consider.
Are you a homeowner dreaming of unlocking cash for a stress-free retirement? With its growth in popularity in Jan 2022, the retirement interest-only mortgage is now a serious competitor.
However, we’ve got some essential information to share.
Through this article, you’ll discover:
- What are retirement interest-only mortgages?
- How retirement interest only mortgages differ from equity release.
- The amount of cash that you can unlock with retirement interest-only mortgages compared to other retirement mortgages.
Our EveryInvestor team is committed to bringing you all the latest UK financial news. Therefore, we’ve done extensive research on the retirement interest-only mortgage. Take a look at our analysis!
What’s a Retirement Interest-Only Mortgage?
Retirement interest-only mortgages are relatively new products in the later-life lending industry. They are similar to the standard interest-only mortgage products, but designed specifically for retirees. An RIO allows older homeowners to unlock the equity tied into their estate and only repay the monthly interest in their lifetime.
How Does a Retirement Interest-Only Mortgage Work?
A retirement interest-only mortgage works by the homeowner’s property being collateral against the loan. The homeowner settles the monthly interest through monthly repayments, but the loan is only repaid, usually from the sale of the property, when the last homeowner dies or moves to a long-term care facility.
What’s great about RIO mortgages is interest roll-up is not a concern so older borrowers won’t have to worry about their entire estate going into the loan repayments.
How Much Can I Borrow with a Retirement Interest-Only Mortgage?
The amount you can borrow with RIO mortgages depends on your later-life income and the value of your property. This can be up to 50% to 65% of your total property value. The exact amount will be determined through affordability checks1 and various other assessments for retirement interest-only mortgages. Retirement interest-only mortgages generally come with more equity to borrow than what you’ll get with a lifetime mortgage.
What Are the Advantages & Disadvantages of a Retirement Interest-Only Mortgage?
The biggest advantage of a retirement interest-only mortgage is that you can gain access to tax-free cash to supplement your income, with only monthly repayments of the interest and not the actual loan. The biggest disadvantage of a retirement interest-only mortgage is that you could risk foreclosure2 if you fail to make the monthly interest repayments.
Here’s more information!
Retirement Interest-Only Mortgage Advantages
- You’ll be repaying the interest monthly, so you don’t need to worry about it compounding.3
- They’re usually cheaper than other retirement mortgage products.
- The cash you unlock with an RIO mortgage is tax-free.
- You’ll more likely have an inheritance left to pass on to your heirs.
- As long as you can continue repaying the interest with RIO mortgages, you can avoid selling your home.
- Financial advice isn’t compulsory, so you don’t have to worry about advice fees.
Retirement Interest-Only Mortgage Disadvantages
- You’ll need to undergo mortgage affordability checks with an RIO mortgage to ensure that you’re able to make monthly interest payments, unlike with lifetime mortgages.
- You could risk foreclosure if you fail to make the monthly payments.
- Your home will be sold when you die or enter long-term care, so you can’t leave the physical property to your heirs.
- The amount you can borrow with RIO mortgages is based on your retirement income.
- RIOs are not regulated by the Equity Release Council.
Interesting Read: Is Equity Release a Good Idea?
How Can Older Borrowers Provide Proof of Income?
Older borrowers can provide proof of income using their current earnings or proof of a form of pension income. Lenders will perform various checks to ensure that you can afford a mortgage in retirement, and these will vary from one lender to the next. Some lenders, like Halifax, will consider your earned income, up to age 70, plus a company pension forecast or annuity statement, and a pension statement. Others may look at your income or retirement income, and pension statements.
Why Might I Need a Mortgage When I’m Older?
There are several reasons you might choose to take out a mortgage loan when you’re older. These may include acquiring a retirement property better suited to your changing requirements, releasing cash from your home to increase your pension income, and providing money to a loved one to acquire their own home.
What’s the Difference Between a Retirement Interest-Only Mortgage & Equity Release?
The difference between a retirement interest-only mortgage and equity release schemes is that the monthly interest repayments are compulsory with a retirement interest-only mortgage, whereas none are required with the latter. Furthermore, you always get to stay in your home with equity release, while you can risk foreclosure with an RIO. However, RIO usually works out cheaper than other later-life loans.
Here’s an example of their differences:
Your property is valued at £200,000, and you need a 50% on that amount, or £100,000. After 15 years, your property might be valued at £300,000. As you go into long-term care, the provider will sell your property and repay the loan at an interest rate of 5%.
|Equity Release (5% Interest)||RIO (5% Interest)|
|Total loan value after 15 years||£211,370||£100,000|
|The remainder after paying off the loan||£88,630||£200,000|
|The total amount of interest paid||£75,055|
Henceforth, when you look at the equity release column, there’ll be less equity in your property for your family as an inheritance after you’ve passed on compared to the RIO mortgage column.
Where Can I Get a Retirement Interest-Only Mortgage?
You can get a retirement interest-only mortgage from certain lenders, banks, and building societies. Nationwide is likely the best-known high street name that offers RIO’s, with others including, Nottingham Building Society, Shawbrook Bank, Leeds Building Society, Family Building Society, and Hanley Economic.
Nationwide is a leading financial services provider and offers RIO mortgages for homeowners or joint mortgage borrowers between the age of 55 and 84. Your mandatory monthly payments are usually lower than their standard residential mortgage offers. In addition, they provide free specialist advice, no fees, flexible loan repayments to prevent interest roll-up, and you can borrow anything from a minimum loan of £10,000 to £500,000. Nationwide is also a leading provider of lifetime mortgage products.
More: Nationwide Products
Nottingham Building Society
Older mortgage borrowers might want to consider Nottingham Building Society to unlock a reliable income at retirement age through an RIO. Interest rates start as fixed but then become variable. In addition, they offer one basic free property valuation, loan repayments of up to 10% annually, with a minimum of £500.
Shawbrook Bank is a financial services provider that offers RIO’s. However, their plans are not regulated by the Financial Conduct Authority (FCA), and we, therefore, don’t recommend their services, whether you want to cover mortgage debt or supplement your income.
Leeds Building Society
Leeds Building Society’s retirement interest-only mortgages are available for individual homeowners and couples between the age of 55 and 80 years old. The maximum loan to value (LTV) is up to 55%. What’s unique about their plan is that no minimum equity is required. Finally, Leeds Building Society does a detailed assessment of your current and future income.
Family Building Society
The Family Building Society has RIO products for homeowners aged 65 and above. Their interest rates are fixed for 5 years at 3.49%. The current follow on rates are 4.39%. Product fees are £999, there’s a 50% maximum LTV, and they offer a 50% cashback.
Hanley Economic Building Society
The Hanley Economic Building Society has a variety of discounted rate retirement interest-only (RIO) mortgage rates. They are for homeowners who are over 55 and already retired. There are no early repayment charges (ERCs) and excess payments can be settled without penalty.
You can get a loan from £10,000 minimum to £750,000 maximum. Hanley’s RIO’s give you the option to be with or without you having a Lasting Power of Attorney in place and lower rates are offered for those with an LPA. You can borrow between 50-65% depending upon the RIO product you select.
Borrower affordability is determined on an individual basis, so each borrower must have enough money to pay the monthly interest repayments individually.
Learn More: The Best Equity Release Companies in Jan 2022
What's A Retirement Interest-Only Mortgage?
Retirement-interest only mortgages (or RIO for short) are relatively new when it comes to products precisely for older homeowners who want to borrow some cash. These retirement interest-only mortgages are there to help people struggling to get the standard mortgage for some reason.
Best of all:
RIO mortgages let you take out a loan against your house and you only need to repay them the interest monthly, instead of the loan itself. Interestingly, RIOs are like standard interest-only mortgages in a way, but there are a few differences.
How Much Can You Release Money With An RIO Mortgage?
To get an idea of the amount of capital you can get from taking out a retirement interest-only mortgage, you have to use the retirement interest-only mortgage calculator which requires you to input:
- The value of your estate – it has to be valued over £70,000
- The age of the youngest homeowner – you have to be aged 55, or have reached the state pension age
- Your postcode (to figure out where you live) – your estate has to be located in the UK
How Do You Qualify for the Retirement Interest-Only Mortgage?
The retirement interest-only mortgage criteria are that you have to be:
- Aged 55 and above, 60 years or have reached the state pension age5
- A homeowner with an estate worth more than £70,000
- Own property within the remits of the UK
How Does A Retirement Interest-Only Mortgage Work?
RIO mortgages let you take out a loan against your house, and you only need to repay them the interest monthly, instead of the loan itself. Interestingly, RIOs are like standard interest-only mortgages in a way, but there are a few differences.
- RIO mortgages mostly require you to repay your loan when the property sells, when you move into permanent care or when you die.
- Some RIO mortgages have terms that are similar to a regular mortgage. So, you either need to repay them after a certain number of years or when you turn 90, for example.
- With RIO mortgages, you only need to show that you can pay the interest, instead of proving you have a regular income as standard residential mortgages require.
- Some RIO mortgages let you repay some cash plus interest. Meaning, your loan balance will decrease over time. This increases your inheritance for your heirs in return.
If you have a secure income to last throughout retirement, then a retirement interest-only mortgage is a great option as you’re still able to leave an inheritance for your heirs. However, if you don’t have financial security and won’t pass an affordability assessment, then you might want to rather opt for a lifetime mortgage.
While you’re not obligated to seek financial advice for a retirement interest-only mortgage, we strongly suggest that you do. A whole market financial adviser or mortgage adviser will help you determine the best course of action for you and your family, and will help you find the best way to release equity, by looking at all your options.
Finally, whatever you do, it’s vital to ensure that the lender you opt for is regulated by the Financial Services Authority (FCA). The FCA oversees the UK financial industry.
Wondering how much cash you might be eligible to unlock? Try our FREE retirement interest-only mortgage calculator right now!