Everything you need to know about Retirement Interest-Only Mortgages

Sometimes getting a mortgage later in life can be difficult, but it does not have to be. Retirement interest-only mortgages can offer a valuable lifeline to mature borrowers as well as being a cheaper alternative to equity release plans 

At Bower Home Finance, our experienced financial experts are on hand to guide and advise homeowners over the age of 55, to help them find the very best mortgage for their own unique needs and circumstances. 

What is a Retirement Interest-Only Mortgage? 

Retirement interest-only mortgages, also known as RIO’s, have been specifically designed for older borrowers over the age of 55, who due to age limits, may struggle to get a mainstream mortgage. 

They are similar to conventional interest-only mortgages where you are only required to maintain the interest payments on the loan on a monthly basis. As long as the payments are maintained the balance will remain the same and you do not have to repay the capital until you pass away or go into long-term care at which point the house is sold and the proceeds from the sale are used to repay the lender. However, some retirement interest-only mortgages carry a fixed term like with regular mortgages. This means the loan must be repaid when you reach a certain age or after a set number of years. 

Another difference between standard mortgages and RIO mortgages is that you are not subject to the same affordability tests so you will only be required to prove that you can afford the interest repayments and not for the capital you’ve borrowed. 

Who are Retirement Interest-Only Mortgages suitable for? 

The clue is in the name; retirement interest-only mortgages are intended for older borrowers that are aged 55 and above. These mortgages are designed to provide financial solutions for homeowners in later life. 

Because they are interest-only and require lower monthly repayments than a standard repayment mortgage, they are well suited to people who are retired but still maintain a regular secure income. When assessing affordability, it is crucial for borrowers to clearly demonstrate their ability to manage the monthly mortgage payments, especially in joint applications, as the financial responsibility of covering the interest is a significant factor in the approval process. 

Am I eligible for a Retirement Interest Only Mortgage? 

To be eligible for a Retirement Interest Only (RIO) mortgage, applicants must meet specific lending criteria, including a minimum age requirement, typically 55 years old. The application process involves a thorough affordability assessment, considering the applicant’s current income, pension, and other financial commitments. Joint borrowers are also considered, with the lender assessing the combined income and credit history of both parties.  

To be eligible for a RIO mortgage, you must meet the eligibility criteria including: 

• You need to be aged 55 or over. 
• You will need to be currently living in or buying your own home in England, Wales, or mainland Scotland. 
• You must be able to make the interest payments each month. 
• You are applying for the mortgage on your main residence. 

Eligibility is also determined by standard lending criteria, which include a detailed assessment of your financial standing and applicant status. If you are unable to qualify for a Retirement Interest-Only Mortgage, there may be other options available to you, so it is important to speak to a qualified whole of market mortgage adviser such as Bower Home Finance. 

How much could I borrow? 

The amount that you could potentially borrow with a retirement interest-only mortgage will vary from lender to lender. In general, with both standard and RIO mortgages, you can borrow less than those that call for you to repay the capital. When you borrow money, it is important to understand the term of your agreement.  

To find out how much you could borrow with a Retirement Interest Only Mortgage (RIO) you should discuss your circumstances with a whole of market mortgage adviser. Get started today with our independent mortgage advisers and find out if a RIO Mortgage is suitable for you.  

Managing your monthly mortgage payments 

Managing monthly payments is crucial when taking out a Retirement Interest Only mortgage. Borrowers must ensure that they can afford the monthly interest payments, which will be based on the loan amount and interest rate.  

It is recommended that borrowers review their budget and consider their income, expenses, and other financial commitments before applying for a RIO mortgage. Additionally, borrowers should be aware of the potential risks of not keeping up with monthly payments, which can result in arrears and, in extreme cases, repossession of the property.  

To mitigate these risks, borrowers can consider seeking advice from a mortgage adviser or exploring other equity release options, such as a standard interest-only mortgage or a Lifetime Mortgage. By carefully managing their monthly payments and seeking professional advice, borrowers can ensure that their RIO mortgage remains a viable and affordable option for their retirement years. 

Comparison to Lifetime Mortgage 

A RIO mortgage differs from a Lifetime Mortgage in that it requires monthly interest payments.  

In contrast, a Lifetime Mortgage typically involves rolling up the interest which can result in a larger debt over time, although you can consider an Interest Only Lifetime Mortgage if you wish the security of never losing your home. With a Retirement Interest Only mortgage, the borrower maintains control over their debt, as they are responsible for making monthly interest payments. This can provide peace of mind, especially for those who want to ensure that their estate is not significantly reduced by the interest that has accrued over time.  

It is essential to consider the potential impact of a RIO mortgage on pension credit and other means tested benefits, as well as the possibility of early repayment charges if the mortgage is repaid before the end of the term. 

The pros and cons of a Retirement Interest Only Mortgage 

As with everything, there are potential positives and negatives when it comes to retirement interest-only mortgages. 

One of the main advantages is that they can be more affordable than traditional repayment mortgages since you will only be paying the interest each month. This can significantly reduce the monthly cost, making it easier to manage your finances during retirement. Additionally, planning for future financial stability is crucial, and these mortgages can help by allowing you to maintain lower monthly payments while preserving your capital. 

However, there are also disadvantages to consider. While you only need to make monthly interest payments, the capital amount you owe does not have to be repaid until the property is sold, typically after certain life events occur, such as your death or moving into long-term care. This means there is typically no fixed end date, and you will be obliged to make payments until the property is sold, so you should ensure you are able to maintain payments throughout retirement.  

The advantages of a Retirement Interest Only (RIO) mortgage 

• The interest-only monthly payments will usually be lower than those on a repayment mortgage. 
• The loan term is not fixed which will mean that you do not have to repay the capital until you no longer need the home. 
• There is no ‘interest roll-up’ like there tends to be with equity release plans which means that it will not erode the remaining capital left for your family’s inheritance. 
• You have the option to use the mortgage to purchase a new property. 

The drawbacks of a Retirement Interest Only (RIO) mortgage 

• Your home could be at risk of being repossessed if you do not keep up with repayments. 
• When you no longer need the home, whether that is after going into long-term care or when you pass away, the property is sold to repay the capital. 
• To ensure that you can make the monthly repayments you will need to pass affordability checks. 
• The amount you can borrow will depend on your retirement income or guaranteed earnings such as a pension as well as the value of your home. 

Is it possible to switch to a Retirement Interest-Only Mortgage? 

Yes. If you currently have a repayment or interest-only mortgage and wish to switch to a retirement interest-only mortgage, then it can be used to repay the existing loan or remortgage your property. Additionally, if you are moving home and looking to refinance your property, assistance is available to help you find the best mortgage options tailored to your needs. However, you will need to ensure you are eligible for the mortgage and pass the affordability assessment with the lender offering the retirement interest-only mortgage. 

We would always recommend working out how much you can afford and check to see if there are any penalties and fees involved when moving away from your current lender. It is important to seek professional advice from a reputable expert such as at Bower Home Finance, before making the switch as they will be best qualified to find out if there are any potential pitfalls and switching mortgages is the right option for your personal circumstances. 

Mortgage advice you can trust 

A retirement interest-only mortgage can be a great option for some homeowners. However, big decisions such as those to do with your mortgage should not be taken lightly. It is always best to seek help from a reliable, knowledgeable finance adviser such as at Bower Home Finance. Our advisers can provide you with all the details about eligibility criteria, loan amounts, repayment terms, and the overall process involved in obtaining a retirement interest-only mortgage. 

At Bower Home Finance, our team of specialists have the experience and expertise needed to provide you with the impartial advice you need to ensure that you are getting the very best deal. Our mortgage advisors will work with you from the beginning of the process. They will answer any questions you have and talk through all your available options before helping to match you with the right lender for your personal circumstances. 

If you are interested in a retirement interest-only mortgage and would like to find out more then please don’t hesitate to contact us or call free on 0800 411 8668 and one of our friendly team will be happy to speak with you.