Angel Thomas
Principal Adviser, In2Equity Ltd
If you are over 55 and your mortgage is ending, or you want to release equity without selling, a Retirement Interest-Only (RIO) mortgage is often the right tool. It is not the same as equity release, it is a regulated mortgage, and it works differently from the standard mortgage you may have had for 25 years.
Here is how it works, who it suits, and the honest alternative most brokers will not mention.
How a RIO works
You pay the interest each month, and the capital is repaid from the sale of the property when you die or move into long-term care. There is no fixed end date, so the capital does not have to be cleared by a deadline. The monthly cost is just the interest, which keeps it affordable on a pension income.
On a £150,000 RIO at, say, 5.5%, the interest-only payment is roughly £687 a month. The equivalent capital and interest payment over 15 years would be around £1,230. That difference is why RIO exists.
Who qualifies
Most RIO lenders require you to be 55 or over, with retirement income that supports the interest payment (state pension, private pension, investment income). Some accept part-time employment income if you are still working. The LTV is usually capped at 50% to 60%, so you need meaningful equity.
RIO vs equity release
Equity release (a lifetime mortgage) is unregulated mortgage lending that rolls up interest with no monthly payment. The debt grows, and the compound interest can eat the equity over 20 years. RIO is regulated, you pay the interest so the debt does not roll up, and you keep control. For most borrowers who can afford the interest payment, RIO is the better option.
The honest alternative
If your goal is a lump sum for home improvements or helping family, a further advance or remortgage on your existing property may be cheaper than a RIO, especially if you have equity and can afford capital and interest. We model both before recommending a RIO, because a RIO is not always the answer.
The end-of-term borrower
If your interest-only mortgage is reaching its end date and the repayment vehicle is short, a RIO can extend the term without forcing a sale. We see this every month with borrowers in their late 60s whose endowment underperformed. The RIO buys time, and time is often the cheapest solution.
What we do
We model RIO against equity release, further advance and downsizing, show you the monthly cost and the debt trajectory for each, and recommend the cheapest route to your goal. If a RIO is right, we find the lender. If something else is cheaper, we tell you.