What is a retirement interest-only mortgage?
A retirement interest-only (RIO) mortgage lets you borrow a lump sum secured on your home and pay only the interest each month. The capital gets repaid when you sell the property, move into long-term care, or die. There is no fixed end date, so you avoid the pressure of clearing the whole balance by a set age.
The FCA regulates RIO mortgages as standard mortgages rather than equity release products. You get the same consumer protections as a result, including the right to switch lender or to make overpayments where the terms allow it.
Who is a RIO mortgage suitable for?
A RIO mortgage suits borrowers who are already retired or close to it and want to borrow without having to repay capital each month. People often use one to remortgage an existing interest-only deal that is nearing the end of its term, to fund home improvements, or to consolidate debts.
You will need to show that your pension income covers the monthly interest comfortably. Lenders run a full affordability assessment, so documented, reliable income matters a lot here.
If leaving as much inheritance as possible is your priority, a RIO mortgage can beat equity release, because the balance stays level rather than growing, as long as you keep the interest payments up.
How do RIO mortgages compare to equity release?
The main difference comes down to payments. With a RIO mortgage you pay the interest monthly, which holds the debt at a fixed level. With a lifetime mortgage, the most common form of equity release, you usually pay nothing each month and the interest compounds (interest charged on interest already added), which can shrink the equity left in your home over the years.
RIO mortgages tend to carry lower interest rates than lifetime mortgages, because the lender gets regular payments and takes on less risk. The trade-off is that you have to prove affordability, while equity release products do not ask for an income assessment.
Your adviser can run the numbers on both so you can compare the total cost and the effect on your estate before you decide.