What is a retirement interest-only mortgage?

A retirement interest-only mortgage is, as the name suggests, an option for homebuyers heading towards retirement age.

Rewind a few decades, and most people expected to have paid off their mortgage by the time they left work. But that’s becoming less common. In fact, new data shows an increase in people over 50 who are looking for remortgage deals to take them close to or into retirement than ever.

The statistics show that searches for 21- to 25-year mortgage terms for the over-50s have surged. They are up 83% in the first quarter of 2024 when compared to the previous year. People in that age range owed £217,065 on average, figures show.

There was also a staggering 156% increase in searches for 10- to 15-year remortgage terms among over-50s.

It seems that retirement is no longer a time for paying off your mortgage and putting your feet up. So, with increasing numbers of over-50s considering mortgages as they near retirement, let’s look at retirement interest-only home loans.

What is a retirement interest-only mortgage?

Official UK Finance figures show that the number of retirement interest-only (or RIO) mortgages approved by lenders increased by 23% year on year in the second quarter of 2024. So, they are becoming more popular.

Remortgaging can be more difficult as you become near to or are at retirement age. RIO mortgages are one way to unlock some of the value in your home. It is as bit like equity release schemes, but there are differences.

RIO mortgages are used by older borrowers who struggle to meet criteria for other mortgages. They are the same principle as standard interest-only mortgages.

That means you only repay interest each month and not the capital of the loan itself. 

For those with a joint mortgage, the terms apply to both borrowers; so you don’t need to sell if your partner dies or moves into care.

The difference between RIO and interest-only mortgages

RIO mortgages are generally easier to obtain than a standard interest-only mortgage due to its repayment structure. It means you only need to prove you can afford the monthly interest payments.

Normally, repaying a standard interest-only mortgage when selling a property using includes strict criteria. This can include large salary requirements. For example, High Street banks such as HSBC require a minimum salary of £75,000. 

It can also include a minimum amount of equity in the property. The Halifax, for example, says this must be £300,000. Many people in the north of England are unlikely to meet that criteria.

This is where RIO mortgages differ the most. Usually, there is no minimum equity or maximum term, so you can take a mortgage to the age of 100 or more! 

Another difference is that if you’re not yet retired, your future pension payments can be taken into account for affordability. 

How do you pay off a RIO mortgage?

Just like any mortgage, you can pay off a retirement-only interest mortgage whenever you wish. If it is within a fixed period, be prepared for an early repayment charge. But, as we have seen, there is a difference as there’s more flexibility when it comes to repayment. Usually there is no minimum equity or maximum term, so you can be have a RIO mortgage aged 100-plus. 

The pros of a RIO mortgage

• Smaller payments mean less strain on income so they are more affordable. You don’t need to worry about paying back the mortgage after a certain period as the term isn’t fixed.
• Eligibility for RIO mortgages are usually simpler as you only need to prove you can cover monthly interest payments.
• RIO mortgages help unlock value in your home. In doing so, they provide extra funds for retirement, which means you could buy other property or give money to family.
• Unlike some Equity release loans the loan amount won’t increase and be rolled up

The cons of A RIO mortgage

There are a number of issues with a RIO mortgage – so you must consider them:

• You must prove to a lender that you can cover monthly interest payments. So, if you have a low income and own only a small percentage of your home a RIO mortgage might not be for you. That’s because a lender might only offer a smaller loan than you need.
• You will forfeit some of your home’s value. That could mean you leave less than you would like for your family.
• As with any loan secured against your home, if you fail to meet monthly repayments you could lose it. 

How to get a retirement interest-only mortgage 

Like any mortgage, RIO mortgages are available through some high street and other lenders. You could look for a deal, but it’s always best to get expert advice. Mortgage brokers usually have access to better deals than you can find on comparison sites or through banks and building societies.

If you would like to talk to our RIO mortgage experts, then contact us today for a no obligation and free appointment.

Your home may be repossessed if you do not keep up repayments on your mortgage.