Retirement Interest Only: An alternative to equity release

When it comes to releasing equity from a property, equity release may not always be the most suitable solutions. Retirement Interest Only could be the right fit for clients who prefer manageable monthly payments, no set end date and the ability to protect their loved ones’ inheritance.

Our financial needs evolve over time, from funding essential home improvements as we grow older to assisting family members onto the property ladder, demand for flexible lending options is growing. 

As your clients look to unlock the potential value tied up in their homes, there are a few lending options available to them. For example, Retirement Interest Only (RIO) mortgages and equity release. 

While equity release may be a viable option for those needing to fund home modifications or to help their loved ones, it isn’t always the right solution for every case. A RIO mortgage may work better for clients who want:

• Predictable and manageable monthly payments
• To protect their loved ones’ potential inheritance
• No need to downsize

What is a Retirement Interest Only mortgage? 

RIO mortgages offer borrowers aged 55+ an alternative to equity release. They’re similar to lifetime mortgages in that the loan is paid in full when the property is sold due to a life event, such as moving into long-term care or passing away. However, unlike equity release, interest is paid monthly so it doesn’t roll up, therefore protecting the remaining equity for inheritance. 

Notably, RIO mortgages have no maximum term and, providing clients can individually afford the monthly interest payments, this solution could give them peace of mind that they can remain in their home with no need to downsize. 

What is equity release? 

Equity release is a type of mortgage that allows later life clients aged 55 and over to access cash from their property without having to move. This could be an option for clients who have limited income but significant property value, or who need a lump sum without monthly repayments. 

The loan for these types of mortgages, along with accrued interest, is repaid when the homeowner passes away or moves into long-term care, typically from the sale of the property.

Pros and cons of Retirement Interest Only mortgages 

Pros:

• Monthly payments are typically lower than repayment mortgages, as only interest is paid
• More inheritance could be saved as interest doesn’t roll up
• Clients can remain in their home until a life event occurs, with no need to downsize 

Cons:

• The capital will remain the same, unless your client makes additional repayments
• Affordability checks are still required before you can apply for a RIO mortgage for your client
• As with any mortgage, the property is at risk if a client does not keep up the repayments

Pros and cons of equity release 

Pros: 

• Optional monthly repayments (note that interest will still be accrued)
• Your client can stay in their property for as long as needed

Cons:

• Interest can accumulate over time, reducing the equity in the home
• The inheritance may be lower due to the loan and accumulating interest

RIO and equity release comparison

Why a Retirement Interest Only mortgage could be the right option for your client 

A RIO mortgage could be beneficial for your client, depending on their personal circumstance. For example, this type of mortgage could be more suited to homeowners who want predictable monthly payments and to protect inheritance.

One example of how a RIO solution has supported borrowers in later life is Joan and Paul, both approaching 85. With their interest-only mortgage ending, and their home requiring lifestyle improvements, their options for a new mortgage were limited. They were faced with either selling their home or equity release. 

Through a RIO mortgage, they were able to transfer their existing loan, add a little extra, and continue making manageable interest-only payments. They also avoided rolled-up interest and preserved equity for their children. As a result, they’ve remained in the home they love and funded a stairlift to support their mobility, demonstrating how the right later life lending solution can have a life-changing impact.

To find out more about RIO mortgages from the Marsden and their suitability for your clients, contact our Distribution Team today.