What’s the difference between a lifetime mortgage and a retirement interest-only mortgage?

There are several key differences between retirement interest-only mortgages and lifetime mortgages. These include:

When you take out a retirement interest-only mortgage, you make monthly payments to pay the interest you owe. If you don’t keep up with your monthly interest repayments on an RIO mortgage, there is still the risk of repossession, in the same way there would be with a standard mortgage.

With a lifetime mortgage, however, you don’t have to make any monthly payments. Instead, the interest you owe builds up over time and is paid back, along with the capital sum you owe, when you move into long-term care or die. As previously mentioned, some equity release plans allow you to make repayments if you want to, to help reduce the amount of interest that’s payable when the property is sold.

The amount you’ll end up owing

As you don’t usually repay any of the interest with a lifetime mortgage, and this interest is compounded, it can build up to significant sums over time.
With a retirement interest-only mortgage, you’ll make interest payments indefinitely, so when you die or move out and your loan has to be repaid, there will be less to pay than if you’d opted for a lifetime mortgage. This means you may have more left in your estate for your heirs.

Affordability assessments

When you apply for a retirement interest-only mortgage, your lender will require you to undergo an ‘affordability assessment’ to check that you’ll be able to afford your monthly interest payments. You’ll still need to pass their particular criteria to be accepted for one of these deals, so depending on your circumstances, a retirement interest-only mortgage may not be an option.

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.

A lifetime mortgage, along with other equity release products, are high risk and won’t be right for everyone. As a result, current rules from the financial services regulator the Financial Conduct Authority (FCA) require you to speak to a qualified financial advisor before you are able to take out an equity release product to ensure that it is suitable for your circumstances. This is to ensure that you fully understand the long term implications of taking out an equity release product. An adviser will also be able to tell you how much your lifetime mortgage is likely to cost. You can also use our lifetime mortgage calculator to give you a rough guide to the sorts of costs you might face.

It’s also a good idea to speak to a broker about retirement interest-only mortgages too, although unlike with a lifetime mortgage it’s not a requirement that you do. Bear in mind that not all brokers who advise on this type of mortgage are professionally qualified to advise customers on equity release options. This means that they might not be able to compare equity release and RIO mortgages to help you decide which is right for you.

Author: wpadmin

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