Retirement interest-only mortgages, or RIO mortgages, are a type of mortgage intended to help meet people’s needs in retirement. They enable you to carry on making interest payments indefinitely, with the loan paid back only when you die or move out. For this reason, they are mainly aimed at people in their 50s and 60s, and have been seeing a large uptick in popularity recently.
With a RIO mortgage, as the name suggests, you only pay off the interest on your loan. You won’t be able to borrow as much as with a repayment mortgage, but your monthly payments will be much lower.
There is no fixed term to a RIO mortgage; the capital is repaid when your home is sold, when you die or when you move into long-term care. Unlike with standard interest-only mortgages, you aren’t expected to demonstrate how you intend to pay off the capital later on, as it will already be expected that this will come from the proceeds of the sale of the property. All you need to prove is that you can make the interest repayments each month, so you will need a good credit history to qualify.
One advantage RIO mortgages have as an option over equity release or other lifetime mortgage products is that by paying off your interest each month rather than at the end, you avoid your interest charges compounding over time. So, by accepting the monthly interest charges, you (or your beneficiaries) will likely get to keep more of the gains when the property is eventually sold.
This option is proving increasingly popular, with Hodge Bank reporting a 50% increase in the number of applicants taking out a RIO mortgage in order to make home improvements. Bear in mind that lenders tend to require that applicants own at least 40% equity in their home before accepting them for RIO mortgages.
The downsides are similar to that of equity release. You’ll likely end up reducing the amount you’re able to leave as inheritance to your loved ones, because funds from selling the property will be used to pay off capital on the loan. You’ll also have to make those interest repayments every month until you die, so this isn’t a financial decision to take lightly, and you may prefer to remortgage to a standard mortgage to borrow extra cash to fund home improvements instead. Bear in mind, however, that lenders will only agree to this if you can demonstrate that you have sufficient income to keep up with your repayments, both now and in the future.
To find out more about RIO mortgages and how they work, check out our article How retirement interest-only mortgages work.
There are a number of mortgage brokers available in the market, but if you’re looking for somewhere to start, we’ve partnered with an experienced mortgage advisor to offer Rest Less members high-quality advice on retirement interest-only mortgages. Book your free, no-obligation consultation here.