Interest-only mortgages are a popular option for those looking to make retirement more comfortable. An interest-only mortgage works differently than a traditional mortgage, where you make both capital and interest payments throughout the life of the loan.

How do RIO mortgages work?

With retirement interest-only mortgages (RIO mortgage), you only make payments towards the interest portion of the loan. This means that your monthly repayments are lower than with a traditional mortgage, and you don’t have to worry about paying off the capital each month.

Retirement Interest Only (RIO) mortgages are quite similar to traditional interest-only mortgages, but there are some key differences, with RIOs, repayment is usually not due until the homeowner sells their residence, shifts into residential care or passes away.

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

Retirement interest-only mortgages and lifetime mortgages vary in a number of ways, including:

• Monthly payments - With retirement interest-only mortgages, you are required to make regular payments in order to cover the interest repayments on your loan. Unlike other mortgages, lifetime mortgage plans do not require you to make regular monthly repayments. Instead, the interest accumulates and is repaid with the original capital sum at a later date.

• The amount you’ll end up owing - The remaining capital at the end of your retirement only mortgage will be the original amount borrowed however with a lifetime mortgage usually added at the end (interest roll-up), over time this can accumulate to a large sum

• Affordability assessments - An affordability check is required with an RIO mortgage therefore a minimum income is required. An affordability assessment isn’t required if you apply for a lifetime mortgage, though, as you won’t have to pay anything back until the property is sold.

Lifetime mortgages form part of equity release schemes and therefore require specialist advisers.

Advantages of a retirement interest only mortgage

This type of mortgage is especially attractive to retirees as it helps them manage their finances better during retirement. By keeping your monthly payments low, you can free up more money to give your more choice in later life such as travel and entertainment, you could even free up money for relatives to help them get on the property ladder.

To meet the lending criteria for the lender you have to prove you can afford the monthly interest payments, this is called an affordability assessment. You only repay the interest on this type of mortgage.  This will give you more disposable income than a standard mortgage. This makes it easier to manage cash flow during retirement without having to worry about making large lump-sum payments.

If you are looking to release equity from your home, this could be the best option for you, the amount can vary depending on the value of your home, as the difference between your current mortgage (if you have one) and the value of your home is the amount of equity your property has. The money can be used for home improvements, to purchase a new property or to pay off existing debts.

Disadvantages of a retirement interest only mortgage

Despite its benefits, there are some potential drawbacks to taking out an interest-only mortgage in retirement. The biggest risk is that you could run out of money if you live longer than expected. You’re not paying off the principal loan amount. So if you don’t have other funds saved up to cover this cost, you could find yourself in a difficult situation.

If you have a low regular income and if you only own a low percentage of the property then the mortgage lender may only be able to grant you a much smaller loan than you need. If this is the case then a lifetime mortgage may be more suitable for you.

Additionally, interest-only mortgages tend to have higher interest rates than standard mortgages, so you may end up paying more in the long run.

This type of mortgage is for older borrowers aged 50+, for people near or in retirement. The full balance of the loan will be paid off once each borrower dies or go into long-term care. 

Your current lender may not offer this type of mortgage but other mortgage providers will have this available to you if you meet their criteria.

Overall, a retirement interest-only mortgage can be a good option for those looking to make retirement more comfortable by reducing their monthly payments. However, it’s important to carefully consider the risks and benefits before making a decision.

Be sure to consult with a financial adviser or mortgage specialist to get the best advice for your situation. With the right tools and information, you can make an informed decision that works best for your retirement dreams.

We are an independent mortgage broker firm. If you are looking for a retirement interest only mortgage, contact us at [email protected] or call on 0151 662 0188.