Interest-Only Retirement Mortgages
(Last Updated: 05/08/2024)
04/06/2018
112
7 min read
What is retirement interest only?
Interest-only retirement mortgages (or RIO Mortgages) mean you don't have to repay the principal of the loan until you die or move permanently into long term care.
You pay the interest only, either monthly or 'rolled-up' when the property is sold.
The Financial Conduct Authority (FCA) (click to view the FCA's relevant legal instrument) gave its seal of approval for residential mortgages of this type in March 2018 and since then, many lenders have launched their own versions.
These mortgages fill a gap in the market regarding aged borrowers.
With traditional mortgages, the loan term is fixed and lenders are less likely to grant a large fixed term to people approaching or at retirement age because of issues with repayment. In contrast, with retirement interest-only home loans, there is no fixed loan term.
They also may provide a solution to the many of those previously caught out being unable to repay the principle at the end of the term of an existing interest-only mortgage.
Ironically, another interest-only mortgage might fix the fault of a previous such mortgage, however the key difference is the lack of fixed loan term.
This article examines retirement interest-only mortgages and considers:
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At what age can you take out a retirement interest-only mortgage?
The actual age you have to be to take up one of these products is not defined by the FCA and is purely down to the individual lender's definition.
Many lenders specify that you have to be aged at least 55 (which is in line with the earliest retirement age of many private pension schemes) whereas for some lenders' products you'll have to be at least 70.
There is no indication that interest-only mortgages are set to be offered to any other age group; prospective residential mortgagees in England and Wales can only take out traditional repayment mortgages.
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What types of retirement interest-only mortgage are there?
There are broadly two main types; one being a retirement mortgage and the other being an interest roll-up lifetime mortgage.
For both types, your loan term isn't fixed; it goes on until you die or move permanently into long-term care.
| Retirement Mortgage | Interest roll-up lifetime mortgage | |
| How is loan paid back? | Capital is repaid from sale of your home | Capital and interest is 'rolled up' and repaid from sale of your home |
| Monthly Interest Repayments? | You have to make all your monthly interest repayments. Some lenders specify that after a certain time (or age you reach) you can choose to roll up the interest (i.e. no longer have to make monthly repayments) | None |
| Is your home at risk? | Yes, if you don't make your monthly interest repayments | No; you are effectively a protected tenant until you die or move permanently into care |
| How much can you borrow? | Sum is based on your retirement income and expenditure up to a specified maximum loan to value ratio | Sum is based on a loan to value ration determined by your age |
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How do retirement interest-only mortgages compare with traditional residential mortgages?
With traditional residential mortgages:
- Your loan term is fixed
- If you have an existing interest-only mortgage, you'd have been expected to set up a separate repayment vehicle to repay the capital
- You have to make all required monthly repayments until the mortgage term ends, otherwise your home is at risk
- Your maximum loan sum is based on your employment income and expenditure up to a maximum loan to value ratio
For both retirement mortgages and traditional mortgages, your home is at risk if you don't keep up repayments, although the repayment figures are calculated differently.
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What's the best way to find out which retirement interest-only mortgage is right for your needs?
At press time, retirement interest-only mortgage products were relatively new, with some significant lenders yet to launch their versions.
The new products are set to add to the more than 3,000 mortgage products presently on the market and as such are relatively untried.
It therefore is well worth considering using the services of an independent mortgage broker to help you choose which one best suits your needs.
Bear in mind the number of pensions presently on the market also; you need to choose a product which is in line with things like your retirement age and the individual stipulations of your pensions/s and what your sources of income might be after you take retirement.
As with all mortgage products, there are many trade-offs also.
An interest roll-up lifetime mortgage-type product leaves you not having to make monthly repayments and means therefore that you can't be evicted under normal circumstances.
The flip side, however, is that interest rates are higher and there might be considerably less capital remaining to put towards your care (or to leave to your descendants) when your house is sold.
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Frequently Asked Questions
There are still interest only mortgages available, to applicants under the right circumstance.
Other than an RIO mortgage, younger applicants may be able to get an interest only mortgage if they can show they have an exit strategy i.e. a way to repay the mortgage once the term is over.
For example, you have:
- a large deposit and are buying with a small mortgage
- substantial equity in another property
- funds in investments, savings, or endowment policies
- a substantial income.
Interest only mortgages are rarer and harder to obtain than a regular mortgage. It is highly recommended to make use of the expertise of an independent mortgage broker to help you choose a realistic product and mitigate the risk to your credit score of making rejected applications.
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You mortgage your property for a cash advance, but with interest (either monthly, or rolled up) the amount you owe when you die or move into care will be larger than the cash you borrowed.
This means there will be less left in equity for you to spend on care, or to pass on to the beneficiaries of your estate.
The longest term for a fixed term interest-only mortgage is 25 years.
There is no fixed term on an interest only retirement mortgage. It goes on indefinitely until you pass away or move into long term care, when the property is sold to repay the mortgage.
There is no upper age limit on interest only retirement mortgages. However, it is less easy for a 68 year old would be able to get a traditional repayment mortgage without predicted income to last the length of the mortgage term.
Equity release is different in that you can roll up the interest and therefore have no monthly payments to meet. Retirement mortgages require a monthly interest payment.
You can sell your house. The mortgage will be paid out of the sale proceeds. If you have run into negative equity (if the property value has dropped below what you owe) then you would have to find the funds to cover the shortfall.
Lenders' whose age limits is based at the end of your mortgage term range from around 75 to 95, so it is certainly possible, but depending on how much you want to borrow, not necessarily easy.
An independent mortgage broker can discuss your options with you and help you choose the right product to apply for.
Access to whole of the market – 100% Impartial advice – No need for face-to-face meeting
Written by:
Andrew Boast
Andrew started his career in 2000 working within conveyancing solicitor firms and grew hands-on knowledge of a wide variety of conveyancing challenges and solutions. After helping in excess of 50,000 clients in his career, he uses all this experience within his article writing for SAM, mainstream media and his self published book How to Buy a House Without Killing Anyone.
Reviewed by:
Caragh Bailey
Caragh is an excellent writer and copy editor of books, news articles and editorials. She has written extensively for SAM for a variety of conveyancing, survey, property law and mortgage-related articles.
