Interest only mortgages in retirement can be an attractive option for homeowners in the UK who want to manage their cash flow, unlock the equity tied up in their property and retain a good-quality lifestyle in their retirement years.
While this type of mortgage was once a popular option before the financial crisis, interest only mortgages in retirement are now subject to strict regulations by the Financial Conduct Authority (FCA) to ensure that borrowers can afford the repayment of the loan at the end of the term.
Additionally, more and more people are struggling to renew their interest-only mortgages as they approach retirement age. Even if you are consistently meeting your repayments, the older you get, the harder it becomes.
As a trusted UK mortgage broker, we feel it's important to educate our clients on the benefits and risks of this type of mortgage to help them make informed decisions about their financial future. We're also here to support our clients with any advice or help that they need.
Contact us today to receive professional, no-obligation advice on interest only mortgages in retirement. We’ll help you navigate this tricky financial product and give our honest advice on the best mortgage type for you as you reach your golden years.
A Retirement Interest Only (RIO) mortgage is essentially an interest-only mortgage for pensioners.
When it comes to interest only mortgages in retirement, borrowers are required to make only the interest payments on their loan, rather than paying both interest and principal, which reduces their monthly payments.
The loan is then secured against the value of your property.
Interest only mortgages in retirement works in a similar way to standard interest-only mortgage, with a few key differences that are outlined below.
The first key point of an RIO mortgage is that it does not have a fixed end date that the mortgage must be paid off by. The loan will only be paid off when the property is sold, you die, or you move into long-term care. This is somewhat similar to Equity Release schemes (such as a lifetime mortgage).
However, a lifetime mortgage does not always require monthly repayments. They often roll the interest up and add it to the total loan value. This can mean a hefty payment at the end of the loan.
Or, in other cases, you can opt for sporadic capital repayment. However, as they are generally inconsistent, there’s a good chance the payments will be higher.
An RIO, on the other hand, does requires you to make regular monthly repayments, just like a standard mortgage, and your interest is distributed within these payments.
This means your repayments will be generally lower than other mortgage types. In addition, your interest rate is fixed and won’t increase over time.
Another key difference is the application process for interest only mortgages in retirement.
RIO applications are much less rigorous than a standard mortgage. application These products have been designed to make it easier for the older generation to secure loans.
To qualify for an interest only mortgages in retirement, you will only have to prove that you can afford to pay off the interest each month, not the loan itself. They allow you to borrow against your property, giving you a much higher chance of being accepted, which is great news for anyone interested in this type of mortgage deal.
There are several benefits of securing an interest only mortgages in retirement. Not only will it help you live out your retirement years to their fullest, but this mortgage deal can also help release re-payment pressures.
Some of the main advantages of interest only mortgages in retirement include:
Lower monthly repayments: RIO mortgages allow you to pay only the interest on your loan, which means your monthly repayments will be lower than with a traditional mortgage.
More flexibility: With a RIO mortgage, you can choose to make payments or not, depending on your financial situation. This can provide you with greater flexibility in managing your retirement income.
Overpayments: Borrowers also have the convenient option of overpaying up to 10% of the loan amount every year without incurring an Early Repayment Charge.
No need to repay capital: With a RIO mortgage, you do not need to repay the capital borrowed during your lifetime, which means you can use the equity in your home for other purposes, such as funding your retirement.
Potentially larger loan amounts: Because RIO mortgages do not require you to repay the capital borrowed, you may be able to borrow more than with a traditional mortgage, which could give you more financial flexibility in your retirement.
No end date: Unlike traditional mortgages, RIO mortgages do not have an end date, which means you can continue to live in your home for as long as you want or need to, without worrying about repaying the loan.
Easier to be accepted: RIO’s have more lenient affordability checks and simpler application processes than most offer mortgage types.
As advantageous as this all sounds, it is always advisable to talk to a reputable mortgage broker before making any big decisions to ensure this type of mortgage deal works for you.
Whilst an RIO mortgage is an excellent financial product for many homeowners approaching their retirement years, this does not make it right for everyone.
This mortgage type does come with some drawbacks and you’ll need to make sure you meet some key requirements in order to be considered for a RIO mortgage.
Some potential drawbacks that you should be aware of when it comes to interest only mortgages in retirement are:
Age restrictions: RIO mortgages are designed for older borrowers, and some lenders may have age restrictions in place. Borrowers may find that they are too old to be eligible for a RIO mortgage, particularly if they are in their 80s or older. In addition, the borrowing amount is partly based on the current age of the applicant.
Limited choice of mortgage products: There are fewer RIO mortgage products available compared to traditional mortgagesm meaning that borrowers have a limited choice when it comes to finding a suitable deal.
High interest rates: RIO mortgages tend to have higher interest rates compared to traditional mortgages. This can make them more expensive in the long run, particularly if the borrower lives for many years beyond retirement.
Repayment risk: RIO mortgages do not require borrowers to repay the capital borrowed, which means that the loan will only be repaid when the borrower dies or sells their property. This means that there is a risk that the sale of the property may not cover the cost of the loan, leaving a shortfall for the borrower's estate to cover, which could impact your family.
Impact on inheritance: As the loan will only be repaid when the borrower dies or sells their property, there may be less inheritance left for their heirs. Additionally, the borrower's home will be sold off to repay the loan when they die or enter long-term care, meaning the property cannot be passed down the family.
As ever, the total borrowing amount will vary on a case by case basis, and a lot depends on your financial situation and your lender.
The maximum you can borrow for an interest only mortgages in retirement sits at around £500,000, and the minimum for borrowing sits at £10,000.
Generally speaking, you’ll be able to borrow less on an interest-only loan than a loan that is repaying capital. This is because lenders see interest-only loans as a higher risk investment.
As you would expect, there are some age limitations for interest only mortgages in retirement.
Applicants must be between the ages of 55 and 80 years old.
If you are over 55 and live in England, Wales or mainland Scotland, you could be eligible for an RIO.
You should also be confident that you could afford the monthly repayments comfortably on a long-term basis.
In addition, your property needs to be worth £100,000 or more to qualify for a Retirement Interest Only mortgage.
If this kind of product sounds appealing to you, we highly recommend speaking to an experienced financial adviser before acting.
The Lending Channel prides itself on offering bespoke financial advice to our clients. We have extensive experience in complex mortgages such as this one and can also provide expert advice and help with:
Whatever your situation, we are dedicated to finding the right mortgage deal for you.
It’s natural to have questions about applying for a complex financial product such as an interest only mortgage in retirement, but our expert team are here to assist you in all aspects, from initial questions to submitting the final application.
We always provide no obligation, fee-free advice and are fully authorised and regulated by the Financial Conduct Authority.
Give us a call today on 01738 583008 or leave an online enquiry through our site to take a step closer towards a Retirement Interest Only mortgage.