Retirement Interest-Only Mortgage (RIO) - a mortgage for older borrowers

A mortgage is not only for younger borrowers: there are financial products in the UK designed for older borrowers, including people who have already retired. One of them is the Retirement Interest-Only Mortgage (RIO). Let’s look at how this type of mortgage works and whether it is worth considering.

What is a retirement interest-only mortgage?

RIO mortgage and rental property in the UK

RIO mortgage - advantages and disadvantages

Advantages

Disadvantages

Is it worth taking out a retirement mortgage with interest-only repayments?

What can be done to make the RIO mortgage pay off?

What is a retirement interest-only mortgage?

A retirement interest-only mortgage (RIO) is a mortgage on which you pay only the interest each month, not the amount borrowed. RIOs are aimed at older borrowers above a minimum age set by each lender (for example, 55). Depending on the lender, you can use a RIO to buy a home or to remortgage, whether you currently have a repayment or an interest-only mortgage.

RIOs are partly similar to a standard interest-only mortgage, but they are not identical products. A RIO is secured on the home you live in as your main residence, whether you are buying it or remortgaging it. It cannot be used to buy a property to let out. You can find more general information in MoneyHelper’s guide to retirement interest-only mortgages.

In addition, because the loan is normally repaid when the home is sold, the lender checks whether you can afford the monthly interest payments from your income in retirement. For joint borrowers, it also checks whether one of you could keep up the payments if the other died. As your payments do not include any repayment of the amount borrowed, your monthly commitment is lower than it would be if you were also repaying the loan. RIOs are regulated mortgages, and you must keep up the monthly interest payments; your home may be repossessed if you do not.

The loan is usually repaid when the last borrower dies or moves permanently into long-term care, often from the sale of the home, although it can also be repaid from other funds. This is a big difference from a standard interest-only mortgage, where at the end of the term you either take out a new deal or repay the amount borrowed, for example from savings, investments or selling the property. In addition, many RIO mortgages do not have a fixed end date.

RIO mortgage and rental property in the UK

With a RIO, as with any interest-only mortgage, you own your home, but monthly payments cover only interest, so the amount borrowed is not reduced and is repaid later, usually from the sale of the property. That does not necessarily make it a poor choice.

The monthly payments on a RIO can be relatively low, because they cover only interest. For example, if you borrowed £150,000 at an interest rate of 6%, the interest would be about £750 a month. Rates vary between lenders and can change.

With a repayment mortgage, your monthly payments are higher because, over the term, you also have to pay back the £100,000, £200,000 or £300,000 you borrowed. This can leave you less money to save, which could be a problem when you want to retire.

Lenders can offer standard mortgages that run into retirement. However, they must take a prudent approach to assessing your income after retirement, and their maximum ages at the end of the term vary.

A RIO can be an option for some borrowers who cannot get a standard mortgage into retirement; alternatives include a standard later-life mortgage, a lifetime mortgage or downsizing.

RIO mortgage - advantages and disadvantages

Like any financial product, the retirement interest-only mortgage has both advantages and disadvantages.

Advantages

• The monthly payments are relatively low;

• The mortgage is usually taken out for an indefinite period;

• Unlike a lifetime mortgage where interest rolls up, you pay the interest on a RIO each month, so the amount you owe does not grow over time. You must, however, be able to afford the monthly payments;

• Property prices can go down as well as up; any money left after the loan is repaid goes to your estate.

Disadvantages

• Affordability is assessed on your income in retirement, such as pensions. For joint borrowers, the lender also considers the income one of you would have if the other died, and this can limit how much you can borrow;

• The maximum loan-to-value is lower than for most standard mortgages and varies by lender. For example, some lenders cap RIO borrowing at 50% to 60% of the property’s value;

• The loan is usually repaid when you die or move permanently into long-term care, often from the sale of your home; anything left after repaying the loan goes to your estate;

• With a RIO, you usually keep making monthly payments on your home for the rest of your life.

Is it worth taking out a retirement mortgage with interest-only repayments?

The answer to this question is not clear-cut, and it will be best if you contact a mortgage broker who can advise you carefully on choosing the right financing for your property.

That said, a few factors are worth considering.

RIOs are often used by people whose interest-only mortgage is ending and who cannot yet repay the amount borrowed, as a natural continuation of this type of financing. In our opinion, switching a repayment mortgage to a RIO makes less sense, as you have probably already repaid some of the amount borrowed, and it is worth continuing to do so, so that in retirement you pay neither mortgage instalments nor rent to a landlord.

With a roll-up lifetime mortgage, the debt grows over time and can significantly reduce what is left to your estate. This is not the case with a RIO, where you pay the interest each month.

What can be done to make the RIO mortgage pay off?

Consider overpaying it. Overpaying a RIO reduces the amount you owe, which can reduce the interest you pay. When your monthly payment is recalculated, and how much you can overpay without an early repayment charge, depend on your lender. Many lenders allow some overpayments without an early repayment charge; check your terms.

Also keep a regular eye on your interest rate. Rate types vary: some are fixed for a period or for life, others are variable. Review your deal before any fixed period ends and compare the total costs, including fees and early repayment charges, before remortgaging.