Retirement Interest Only (RIO) mortgage or Equity Release?

Mature couple with financial documents in home interior

Ask the expert at Smith & Pinching about Equity Release and Retirement Interest Only (RIO) mortgages. - Credit: Getty Images/iStockphoto

My partner and I are in our mid-sixties. We would like to buy a house together for our retirement but don’t have sufficient capital to pay for a property outright. We can probably fund somewhere between 60pc to 70pc of the purchase price. We’d like to borrow against our new property but wonder if a mortgage is the right solution – if we can even get one at our age. Should we take out equity release on the property instead? We’ve both worked for local government for many years so will have decent pensions when we retire.

Diane Fish, mortgage and equity release adviser with Smith & Pinching

Diane Fish, mortgage and equity release adviser with Smith & Pinching - Credit: Smith & Pinching

Diane Fish of Smith & Pinching responds:

I can’t tell you specifically what type of borrowing would be best without looking at the full picture of your financial circumstances, but I will explain some of the possible options here.

Firstly, lenders are increasingly willing to lend to older borrowers. However, they may still put an upper age limit on when you reach the end of the mortgage term. The good news is that the upper limit from some lenders has gone up to age 85, giving you around 20 years for repayments if you borrow now.

If repaying both the capital and the interest is likely to be a strain on your finances, a Retirement Interest Only (RIO) mortgage may be suitable. It could allow you to borrow the amount required for the purchase, with the monthly repayment based purely on an ‘Interest Only’ basis during your lifetime. The capital borrowed would be repaid when your home is sold, if you die, or go into long term care.

Equity release can also be used to purchase a property, as well as an option on a property you already own. The loan amount is based on the applicants’ age and the value of the property. The interest can be repaid monthly as above or can be rolled up (compound interest) so neither interest nor capital has to be paid until you die, go into care or sell the property.

Your home may be repossessed if you do not keep up payments on your mortgage. Taking out a Lifetime Mortgage/Equity Release arrangement will mean that the value of the estate you leave to your family when you die will be reduced. It may also affect your entitlement to any means-tested benefits both now and in the future. Equity Release can be more expensive when compared to a normal residential mortgage. In addition, you will still be responsible for maintaining the property.

This is a lifetime mortgage. To understand the features and risks, ask for a personalised illustration. There will be a fee for the Equity Release/mortgage advice. The precise amount will depend upon your circumstances, but we estimate that it will be a minimum of £1,100. Any opinions expressed in this article do not constitute advice.

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