What is a retirement interest-only (RIO) mortgage and can I get one?

If you’re aged 50 or over and are struggling to remortgage, a retirement interest-only (RIO) mortgage may be an option. 

Remortgaging can become harder as you get older, especially if you’re at or near retirement. 

Retirement interest-only mortgages can also be a good way to unlock some of the value of your home, like an equity release scheme, but with some key differences. 

What is a retirement interest-only mortgage?

Retirement interest-only mortgages, also known as RIO mortgages, have two main uses.

Firstly, they can be used by older borrowers who may struggle to meet lending criteria for other types of mortgages.

The general principle is the same as a standard interest-only mortgage.

You take out a loan against the value of your property and only repay the interest each month, not the capital of the loan itself.

The main difference is that a RIO mortgage is usually only repaid when your property is sold, which could happen when you die or move out of your home into long-term care.

If it’s a joint mortgage, the terms apply to both borrowers, so you won’t need to sell if your partner dies or moves into care.

Due to the repayment structure, it’s easier to obtain a RIO mortgage than a standard interest-only mortgage as you only need to prove that you can afford the monthly interest payments.

How do retirement interest-only mortgages work?

Below is an example of how an RIO mortgage works.

Helen and Mark own a property that’s worth £200,000 and get a RIO mortgage for 25% of their home’s value (£50,000) at 5% interest.

The house increases in value, and 15 years later, it is worth £300,000, at which point they both move into long-term care, and the property is sold.

Over their 15-year RIO mortgage, the couple made monthly interest repayments of around £208 and paid nearly £37,500 in interest.

As they didn’t make any capital repayments, they still owe £50,000 to the lender, and this is paid from the proceeds of the sale, so they are left with £250,000.

Which lenders offer RIO mortgages?

Similar to traditional mortgages, RIO mortgages are offered by a range of lenders, including major banks and building societies.

It’s a good idea to seek out the advice of a qualified mortgage broker to help boost your chances of a successful application and to access the best rates. 

What’s the difference between a RIO mortgage and a lifetime mortgage?

A RIO mortgage is similar to a lifetime mortgage, in that they are often used as a form of equity release. 

However, there are some key differences, which are below: 

• A lifetime mortgage can only be taken out when you own most or all of your home, while a RIO mortgage can be taken out to pay off a previous mortgage, as well as to release equity.
• A RIO mortgage always involves paying off the interest as you go. While you can do this with a lifetime mortgage, you can choose not to (in which case the interest compounds instead).
• RIO mortgages may be available from the age of 55, but some providers may offer one at a slightly younger age, so you may be able to access this before a lifetime mortgage.
• The application process is more stringent compared to an interest roll-up lifetime mortgage, as you need to prove you can afford interest payments.
• Lifetime mortgages are only available through brokers with equity release qualifications, but RIO mortgages are more freely available. 

How does a RIO mortgage get paid off?

Unlike standard mortgages, RIO mortgages don’t have a fixed term.

So, you make interest payments every month, but the full loan amount is only repaid when the property is sold.

It’s worth noting that some lenders will allow you to make capital repayments as you go.

This can be useful if your financial situation changes and you want to reduce the size of your loan and interest payments.

What are the advantages of a RIO mortgage?

• Eligibility: With a retirement interest-only mortgages, usually all you need to do is prove you can cover the monthly interest payments.
• Affordability: Smaller payments mean less strain on your income. As the loan term isn’t fixed, you don’t need to worry about paying it back after a certain period.
• Value: RIO mortgages are similar to equity release schemes like lifetime mortgages, some of which don’t require you to make any monthly repayments. Instead, they ‘roll up’ interest, but this means the amount you owe can quickly grow. With a retirement interest-only mortgage, the interest doesn’t accumulate, so they may be cheaper in the long run.
• Unlocking value in your home: Taking out a retirement interest-only mortgage can provide extra funds for retirement, allowing you to purchase property, or gift money to friends and family.
• Planning an inheritance: As you’ll be paying off interest on the loan as you go, you’re more likely to have something left to leave to your loved ones following your death.

What are the disadvantages of a RIO mortgage?

• Eligibility: You need to prove to the lender you’ll be able to cover monthly interest payments, which can be difficult if you have a low income and only own a small percentage of your home. In this case, a lender might only approve you for a smaller loan than you need. In this situation, a lifetime mortgage or a home reversion might be a better option.
• Forfeiting some of your home’s value: As the loan will be repaid from the sale of your home, the amount of money you can leave to your family may be reduced.
• Repossession: The loan is secured against your home, so failing to meet monthly repayments could mean losing it. However, you may be able to move to an interest roll-up (lifetime) mortgage, with no monthly repayments but a higher amount to repay at the end.

Who can get a retirement interest-only mortgage?

Whether you’ll qualify for an RIO mortgage will depend on the lender’s terms.

The property must be your main residence, and the lender may insist on you owning a minimum amount of the equity.

However, some RIO mortgages have no minimum equity requirement.

Usually, you’ll have to be aged 50 or over to get a RIO mortgage, but this tends to be 55.

As you get older, your choices will be more limited, and you may find it harder to prove you can meet monthly payments.

There will be minimum income requirements linked to how much you wish to borrow.

How do I get the best retirement interest-only mortgage?

It’s always worth seeking expert advice when considering any high-value financial product such as a mortgage.

An independent mortgage broker can go through your options so you can decide whether this is the best solution for you, and find the right product.

How much can I borrow with a retirement interest-only mortgage?

How much you can borrow depends on the lender’s affordability assessment and the total value of your home.

This covers more than just your income. Personal and living expenses will be considered, along with factors that could affect your income and your ability to make repayments. 

Your lender will also consider the loan-to-value (LTV) ratio of your RIO mortgage, as a high LTV means more risk, so will result in you paying a higher interest rate.

With any form of interest-only mortgage, lenders are generally willing to lend less than they would if it were a standard capital repayment mortgage, to minimise risk.

For example, while you may be able to borrow 70% of your home’s value with a repayment mortgage, you might get only 60% with an interest-only mortgage.

FAQs on RIO mortgages

What if I die? What happens to the mortgage?

Once all the people named on the mortgage have died, the property will be sold, and the funds will be used to settle the outstanding loan.

This generally also applies once all the mortgage holders have moved into long-term care.

What happens if I want to move house?

If you decide to sell and downsize to a smaller property, any outstanding loan will be settled using proceeds from the sale.

You might also be able to transfer the mortgage to a new property, a process known as porting.

However, be aware that early repayment charges might apply.

Can I remortgage?

You can remortgage a RIO mortgage, but this could involve another affordability assessment if you need a bigger loan or switch providers.

What are the costs of a retirement interest-only mortgage?

Fees vary between products and mortgage providers, but you should budget to spend between £1,000 and £3,000.

You may have to pay an arrangement fee, survey and valuation fees, and a completion fee.

You’ll need a solicitor to act on your behalf as well as advice from an independent mortgage broker.

You’ll almost certainly find some lenders offering fee-free and cashback deals, so be sure to explore the full range of products available.

What if I can’t afford the interest?

Failing to make interest repayments on your mortgage could mean your house will have to be sold, or that you need to move onto an interest roll-up lifetime mortgage.

You should always discuss any problems with a professional adviser as soon as possible.

Unbiased can quickly connect you to a qualified mortgage broker who can help you find the best mortgage for your unique circumstances

Get expert financial advice

A retirement interest-only mortgage can be a useful tool for older homeowners seeking to unlock their home’s value or to manage existing mortgage debt.

It offers the flexibility of paying just the interest while leaving the loan principal to be repaid when the property is eventually sold.

While it has its advantages, such as lower monthly payments and no fixed term, it’s important to weigh these against the potential downsides, like a reduced inheritance value.

Unbiased will match you with a qualified mortgage broker who can help you navigate the complexities of RIO mortgages and find the best solution tailored to your needs and financial situation.