Retirement interest only mortgages - RIO's
A retirement interest only mortgage is a type of loan designed for homeowners aged 55 and over. A RIO mortgage as it is also known, can be a more affordable option for older borrowers as you only make monthly repayments against the interest, not the capital.
The following information explains how this type of older borrowers’ mortgage works, who is eligible and how much you can borrow to help you decide if a retirement interest only mortgage is a good idea for you.
What is a retirement interest only mortgage and how does it work?
Retirement interest only mortgages are later life mortgages for older borrowers who may be struggling to get a standard residential mortgage or prefer a mortgage with no fixed term.
With this type of retirement mortgage you only repay the interest on a monthly basis, not the capital. This means your monthly repayments are typically lower compared to a residential mortgage, which can appeal to retirees or those making future retirement plans.
Unless you choose to make repayments against the original loan, which is a feature of some RIO mortgages, the capital is only repaid once you die, move into long term care or sell your property.
Retirement interest only mortgage rates
RIO mortgage rates are usually variable or fixed for a specific number of years. Once you come to the end of your fixed term, you can either move to your lenders variable rate or remortgage to another retirement mortgage deal.
The best retirement interest only mortgage rate you can achieve will depend on the lenders terms, market conditions and your creditworthiness. For example, in May 2023 the best RIO mortgage rates range from 4.29% for a 2 year discounted rate with Scottish Building Society to 7.34% for a 10 year fixed rate with LiveMore.
Some RIO mortgage providers also give you the flexibility to change to a lifetime mortgage at a certain point, if you decide the monthly repayments are too much.
Who is eligible for a RIO mortgage?
To qualify for a RIO mortgage you typically need to be at least 55 years of age, able to demonstrate you can afford the monthly interest repayments and show you have significant capital in your property.
Eligibility can vary however as some lenders have no minimum equity level or may accept homeowners from the age of 50.
What is the maximum age for a retirement interest only mortgage?
Although some retirement interest only mortgages have a maximum age of 80 to 85 years old, many RIO mortgages have no upper age limit. So over 60 and over 70 years olds can apply but you may find your options are limited the older you get.
The main consideration with this type of retirement mortgage is that you can prove you have the funds available to repay the interest on a monthly basis.
How do older borrowers prove their income?
Although you only need to demonstrate you can afford monthly repayments against the interest with this type of older borrowers’ mortgage, you still need to prove you can generate an income. This can be done several ways:
- Company pension forecast
- Annuity statement
- State pension statement
- Investments
- Earnings
- Bank statements
How much can I borrow with a RIO mortgage?
The amount you can borrow with a RIO mortgage is typically up to 75% of the value of your property but this depends on the lender, your age, income and property value. In addition, there will be a minimum amount you can borrow which is usually around £10,000.
Are retirement interest only mortgages safe?
Retirement interest only mortgages are safe if you choose a reputable Financial Conduct Authority authorised lender. However just like standard residential mortgages they are secured against your property. Therefore, you will need to keep up with your payments or your home could be repossessed.
Is a retirement interest only mortgage the same as equity release?
Although both types of mortgages are for older borrowers, a retirement interest only mortgage is not the same as equity release. With a RIO mortgage, you repay the interest monthly, whereas with equity release, there are no monthly repayments as the loan plus interest are repaid when you die or move into care.
So with an equity release lifetime mortgage, both the interest and the loan grow. However, with a retirement mortgage, because you are repaying the interest, the size of the loan remains the same. This means you will have more inheritance to leave to family with a RIO mortgage than a lifetime mortgage.
However as there are no repayments with equity release, eligibility is straightforward with no affordability checks. In addition, you don’t have to worry about monthly payments.
To understand which option is best for you, you could speak to an expert like Age Partnership who is qualified to give advice on both RIO mortgages and equity release. Their advice is free and they can help guide you in the right direction.
What are the advantages and disadvantages of a RIO mortgage?
As with all financial decisions, it is important to understand the pros and cons before deciding if this type of retirement mortgage is right for you.
Advantages of a RIO mortgage
- Cheaper interest only monthly repayments
- Available for older borrowers
- The capital is only repaid when you die, move into care or sell your property
- Interest rates tend to be cheaper compared to lifetime mortgages
- The interest isn’t compounded as it is with equity release
- You can stay in your home (as long as you keep up with the monthly repayments)
- Some lenders give you the option to repay some of the capital each year
Disadvantages of a RIO mortgage
- You must prove you can afford the repayments
- Loan to value is lower compared to other mortgages
- The interest rate is only fixed for a number of years so your payments could increase
- If you renew at the end of the fixed term you may incur additional charges
- Your home could be repossessed if you don’t keep up with the repayments
- There’s no protection from any drop in property prices
- As the capital is repaid from the sale of your property, it will affect your family’s inheritance
Are retirement interest only mortgages a good idea?
A retirement interest only mortgage could be a good idea if you’re coming to the end of a standard interest only mortgage and can’t repay the loan, or you want to release equity from your property. However, a RIO mortgage may not be a good idea if you can’t afford the monthly repayments.
In this instance equity release may be preferable, which is why it could be worth speaking to a specialist qualified in both options. Many offer free initial advice so they could help you understand whether a retirement mortgage is a good or bad idea for you.
What should I do now?
Need some free advice on mortgages for over 50s – please contact us using one of the options below and we will get Age Partnership to contact you.
Alternatively, if you would like to know more about lifetime mortgages – read our guide to equity release.