A retirement interest-only (RIO) mortgage lets older borrowers take out a mortgage with no set end date. You pay the interest each month but not the loan itself. The loan is repaid when you die, move into care, or sell the home.
RIO mortgages were introduced in 2018. They fill a gap between standard mortgages and equity release. Let’s take a look at how they work, who they suit, and what to watch out for. This information is for general guidance only, and we recommend you always speak to a qualified adviser before you act.
What is a retirement interest-only (RIO) mortgage?
With a standard interest-only mortgage, you pay interest each month and repay the full loan at the end of the term. Most lenders set a maximum age at the end of the term, often 70 or 75. This locks many older borrowers out.
A RIO mortgage removes the fixed end date. You still pay interest each month, but the loan is only repaid when a set life event happens. These are usually death, moving into long-term care, or selling the home.
This means the loan can run for the rest of your life if needed. There’s no deadline to repay the capital.
Who can get a RIO mortgage?
RIO mortgages are designed for older borrowers. Most lenders set a minimum age of 55. Some start at 60. There’s no upper age limit for applications, which is one of the key benefits.
To qualify, you need to show you can afford the monthly interest payments. Lenders look at your pension income, savings, and any other regular income. They need to be confident you can keep up the payments for life.
You also need enough equity in your home. The loan is secured against the property. Most lenders won’t lend more than 50% to 60% of the home’s value.
How does a retirement interest-only mortgage work?
You borrow a lump sum secured on your home. Each month you pay the interest on that loan. The amount you borrowed doesn’t go down. It stays the same until the loan is repaid.
The loan ends when one of these things happens:
- You die
- You move into long-term care
- You sell the home
At that point, the home is sold and the loan is paid off from the sale. Any money left over goes to you or your estate.
Because you pay the interest each month, the loan doesn’t grow. This is different from a lifetime mortgage, where interest can be added to the loan and compound over time.
Advantages and disadvantages of a RIO mortgage
Pros
- No end date. You don’t have to repay the loan by a set age. It runs until a life event triggers repayment.
- Lower monthly cost. You only pay interest, not capital. This keeps monthly payments lower than a repayment mortgage.
- Loan doesn’t grow. As you pay the interest each month, the loan stays the same size. You know exactly what will be owed.
- You stay in your home. Unlike downsizing, a RIO lets you stay in your home and still access its value.
- FCA regulated. RIO mortgages are regulated by the Financial Conduct Authority. This gives you more protection than some equity release products.
Cons
- You must afford the interest. You pay interest every month for the rest of your life. If your income drops or your health changes, this could become a strain.
- Less for your estate. The loan is repaid from the sale of your home. This reduces what you leave behind.
- Fewer lenders. Not many lenders offer RIO mortgages. Your choice of products is more limited than with a standard mortgage.
- Property at risk. As with any mortgage, the lender can repossess your home if you stop paying.
What’s the difference between RIO and lifetime mortgages?
Both are for older borrowers. Both are secured on your home. But they work very differently.
With a RIO mortgage, you pay interest each month. The loan stays the same size. Lenders check you can afford the payments before they lend.
With a lifetime mortgage, you don’t have to make monthly payments. Instead, the interest is added to the loan. Over time, the loan grows. This can eat into the value of your home much faster.
A lifetime mortgage may suit you if you cannot afford monthly payments. A RIO may suit you better if you have a steady income and want to keep the loan size fixed.
Both products have their place. The right one depends on your income, your goals, and how you want to manage your home’s value.
Can I remortgage?
Yes. If you already have a RIO mortgage, you can often switch to a new deal. You might do this to get a lower rate or to release more equity.
You can also switch to a RIO from a standard mortgage. This can help if you’re coming to the end of an interest-only term and need more time.
As with any remortgage, you’ll need to meet the lender’s criteria. A broker can help you find a lender who accepts RIO applications and compare the deals available.
How to get a retirement interest-only mortgage
Start by working out what you need. How much do you want to borrow? What can you afford to pay each month? Do you have a clear reason for the loan?
Next, speak to a broker who knows about this market. Not all mortgage brokers deal with RIO products. You need someone with experience in later-life lending. They can tell you which lenders to approach and how to present your application.
You’ll also need a solicitor. The lender will require legal advice to be in place before the loan completes.
The process takes longer than a standard mortgage in some cases. Plan ahead and don’t rush.
What to do if you can’t afford the interest on your RIO mortgage
If you’re struggling to keep up with monthly payments, act early. Don’t wait until you’re in arrears.
Contact your lender first. Many have hardship teams who can discuss options. These might include a temporary break from payments or a move to a different product.
You could also speak to a broker about switching to a lifetime mortgage. This removes the need for monthly payments. But the loan will grow over time, so it is not a simple swap.
Free debt advice is available through services such as MoneyHelper. They can help you look at all your options without pressure.
Final thoughts
A RIO mortgage is a useful option for older borrowers who can afford monthly interest payments and want to stay in their home. It keeps the loan size fixed and gives you more control than a lifetime mortgage.
But it’s not right for everyone. You need a steady income to keep up payments. And the pool of lenders is smaller than standard mortgages.
Pepper Money works with brokers who understand later-life lending. You can find a broker through us today.