A good alternative to equity release

Retirement interest-only mortgages could be a better way to access funds than equity-release products.


An RIO gives you more money to play with

It has been 12 months since retirement interest-only mortgages went mainstream. These mortgages can be a good alternative to equity release for older borrowers, but they have previously received little publicity, with lenders slow to make products available.

An retirement interest-only mortgage differs from a standard interest-only mortgage in that there isn't a set end date for the loan. It only has to be repaid when you sell your property, die or go into long-term care. The affordability calculations also only look at whether you can afford to repay the interest on the loan, not the capital, as that will be paid back when the property is sold.

Many people are not aware of retirement interest-only (RIO) mortgages as in the past they have been lumped in with equity release products. However, last year, the Financial Conduct Authority the City regulator reclassified RIO mortgages as standard mortgages, so that mainstream lenders could start offering them.

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It was a good move as retirement interest-only mortgages are quite different to equity release. With the latter, you take out a lifetime mortgage on your home. You don't have to repay the loan until you die or the house is sold, and importantly, you also don't have to make monthly interest repayments. Sounds great, but in reality, this comes with a massive sting in the tail. Because you aren't making any repayments, the interest is rolled up and added to the amount that the equity release firm takes when your home is eventually sold. That interest quickly mounts up. For example, a £100,000 equity release loan at 5% interest would mean you owed £211,370 after 15 years, assuming interest is compounded monthly.

By contrast, with an RIO mortgage, you repay the interest every month, so it never compounds. On the above loan, you would repay £416 a month and after 15 years still owe the initial £100,000. In total you would have paid £74,880 in interest repayments, far less than would be owed with equity release.

The drawback to RIO mortgages is the interest rate. While they are competitive against equity-release products, standard mortgages are far cheaper. For example, Leeds Building Society has launched a ten-year fixed rate ROI at 3.99%. TSB has a standard ten-year fix at 2.29%, but it won't lend beyond your 75th birthday. So, you may want to leave the RIO mortgage until standard mortgages are no longer an option.

If you’d like to find out how much equity you could release from your home, or to find out more about equity release in general, visit our partners, UK Experts Online, for a free report.

Ruth Jackson-Kirby

Ruth Jackson-Kirby is a freelance personal finance journalist with 17 years’ experience, writing about everything from savings and credit cards to pensions, property and pet insurance. 

Ruth started her career at MoneyWeek after graduating with an MA from the University of St Andrews, and she continues to contribute regular articles to our personal finance section. After leaving MoneyWeek she went on to become deputy editor of Moneywise before becoming a freelance journalist.

Ruth writes regularly for national publications including The Sunday Times, The Times, The Mail on Sunday and Good Housekeeping among many other titles both online and offline.