In this article, we will explain the pros and cons of lifetime mortgages and retirement interest-only mortgages. There are some core differences between a lifetime mortgage and a retirement interest-only mortgage that people have found confusing. Here in this article, we will explain the two types of mortgages in detail and try to help you make an informed decision. We will answer the most asked questions such as what is a lifetime mortgage, what is a retirement interest-only mortgage, what is the difference between a lifetime mortgage and a retirement interest-only (RIO) mortgage, how much can I borrow with an RIO mortgage, who can get a retirement interest-only mortgage etc.
Post Topics – Lifetime Mortgage vs Retirement Interest Only Mortgage
Lifetime vs Retirement Interest-Only Mortgage
It’s great news for the consumer – there has been something of an explosion in the number of equity release products now available for borrowers over the age of 55.
When faced with such an overwhelming choice, choosing the solution that most fits your needs and circumstances can be challenging.
Here we will explain how lifetime mortgages and retirement interest-only mortgages work. Plus, we’ll summarise some of the key differences between them.
What is a lifetime mortgage?
Let’s start by outlining the principal features of a lifetime mortgage.
In a nutshell, it is just that – a mortgage which lasts your lifetime (or until you move into long-term residential care) with both the capital and, if you so choose, the interest too, repaid only at the end of the mortgage itself.
At the end of the lifetime mortgage, your property is sold to clear the capital and interest repayments. But, until then, you continue to own your home – which you live in just as you have done before.
Eligibility typically starts as soon as you reach the age of 55 to unlock the equityThe difference between the value of the property and the amo... otherwise tied up in the home you own.
The cash is yours to spend as you choose.
What is a retirement interest-only mortgage?
A retirement interest-only mortgage (also known as an RIO) is also fairly self-explanatory.
The principles will be familiar to anyone who has had or read about other types of interest-only mortgages – you only pay the interest each month whilst repayment of the principal loan is held over until the mortgage reaches full term.
In the case of this kind of retirement mortgage, the full term is typically reached only when you die or move into long-term residential care. You will need to make monthly interest payments – just as you would on any other interest-only mortgage – your ability to make those monthly payments is usually the principal qualification you may need to achieve.
When you die – or you move into long-term residential care – the proceeds from the sale of your home are used to repay the capital sum you have borrowed.
What is the difference between a lifetime mortgage and a retirement interest-only (RIO) mortgage?
There are several key differences between a lifetime mortgage and a retirement interest-only mortgage:
- to arrange a lifetime mortgage, you will need to consult a broker specifically qualified in such equity release plans, whereas an RIO may be available through general financial brokers and lenders;
- depending on the lender, you may find that you may qualify for an RIO at a slightly younger age – 50 years of age, for example, rather than the 55 required for a lifetime mortgage;
- because you will be making monthly interest payments on an RIO, there is likely to be closer scrutiny of your ability to make these payments – compared with a lifetime mortgage, when accumulated or rolled over, interest payments can be met through the sale of your home;
- lifetime mortgages typically give borrowers the option of making monthly interest payments or allowing them to roll over until the end of the agreement – with an RIO, you will need to be sure you can meet the required interest repayments every month;
- a further important distinction is that you usually need to own the whole equity (100%) of your home to arrange a lifetime mortgage. With an RIO you may choose to repay the outstanding balance on any existing mortgage while enjoying further cash from this form of equity release.
How much can I borrow with an RIO mortgage?
As with any interest-only mortgage, the assessment of your eligibility for an RIO will depend on the lender’s particular policies. It is likely to focus primarily on the affordability of the loan (especially your ability to meet the monthly interest repayments) and the value of your home (from which the capital will eventually be repaid).
So, not only your income but also your lifestyle choices – and the expenditure these entail – will also be considered by any potential lender.
In common with interest-only mortgages in general, an RIO may allow you to borrow less than with a regular repayment mortgage – the delay in the repayment of capital introduces further risk for the lender. Because of that, the loan to valueThe ratio of the mortgage amount to the value of the propert... (LTV) that you secure with an RIO might be 60%, let’s say, whereas a standard repayment mortgage might have realised a 70% LTV.
Who can get a retirement interest-only mortgage?
These retirement mortgages are generally targeted towards older homeowners – the over-55s, those in their 60s, or others who have already entered retirement and may find an RIO somewhat easier to arrange than a standard interest-only mortgage.
Nevertheless, you need to keep in mind your commitment to an RIO to maintain the monthly interest repayments throughout. This might become progressively more difficult the older you get – and will continue to inform the lender’s assessment of your income and the amount you want to borrow, whatever your age.
Lifetime mortgage or a retirement mortgage – which is suitable for me?
As with any financial decision, the choice between a lifetime mortgage vs RIO calls for careful consideration – preferably with the help of professional financial advisers with experience in equity release, such as us here at NeedingAdvice.co.uk.
That professional advice will be aimed at helping you weigh up the respective benefits and advantages – along with any downsides – of both lifetime mortgages and retirement interest-only mortgages.
Whether you choose an RIO or a lifetime mortgage as the type of equity release best suited to your needs and circumstances, independent professional financial advice is likely to be essential.
It is the help and assistance that here at NeedingAdvice.co.uk we remain ever ready to extend to our clients.
FAQs – Retirement interest-only mortgage vs Lifetime Mortgage
Do I need to make a monthly payment on a lifetime mortgage?
No. A lifetime mortgage does not require you to pay back the capital borrowed until the end of time. However, if you do decide to sell your property before the term expires, then you will still owe the full amount of the capital borrowed.
What happens to a retirement interest mortgage when I go into long-term care or pass away?
Unlike standard mortgages, you don’t have a fixed term for a retirement-interest mortgage. Instead, it continues indefinitely until you die or move out of your home. If you were to enter long-term care, however, this would mean that you could no longer afford to repay the capital borrowed. In this case, the lender would take possession of your property and sell it to recover the outstanding debt. Please note that you may need to contact an independent mortgage broker to get more details about retirement interest-only mortgages.
What is the difference between a lifetime mortgage and a retirement interest-only mortgage?
One of the major differences between a lifetime mortgage and a retirement interest-only mortgage is the affordability assessment by the mortgage lender. When you apply for a retirement interest-only mortgage, you will need to undergo the affordability assessment set up by the lender. However, when you apply for a lifetime mortgage, your lender may not require you to undertake the same affordability assessment.
If you are interested in any of the above mortgages, you can contact a mortgage broker to help you with your application. An expert broker can help you to find the most suitable mortgage deal as per your profile.
Is a retirement mortgage right for me?
Getting a mortgage is harder when you get older because lenders worry about the prospects of repaying the loan. But there are ways around this problem. For example, you might consider taking out a reverse mortgage instead. This is where you borrow money from your bank against the value of your house. You’ll only start paying back the money after you’ve moved out or died.