RIO vs Equity Release Lifetime Mortgage

As retirement approaches, many homeowners start thinking about how to make their finances go further - without giving up the home they love. Borrowers may also want to access funds to support their lifestyle or help loved ones on to the housing ladder.

Two of the most popular retirement mortgage choices are Retirement Interest Only (RIO) mortgages and Equity Release Lifetime mortgages. Both are designed to give you access to equity in your property in later life, but they work in different ways. Here’s what you need to know.

How do these mortgages work?

Retirement Interest Only (RIO) Mortgages

A RIO mortgage lets you borrow against your home and only pay the interest each month. The money you borrowed is repaid later - usually when the property is sold after you move into long-term care or pass away. Paying the interest each month ensures that the amount you owe remains the same over time. Assuming your house price remains the same or increases over the period, then it ensures you have a legacy to leave to your loved ones.

You must meet your monthly payments and therefore you need to show that you can afford them both now, and in the future. If you miss payments, then your home may be at risk.

This keeps monthly payments predictable and manageable, which could be ideal if you're on a fixed income and want to leave more of your estate to your family.

Another aspect of RIO’s is their flexibility. Often, a RIO can be taken over as little as 3 years or can last for the rest of your life – it’s your decision.

Equity Release Lifetime Mortgages

Like RIO, a lifetime mortgage lets you access the value tied up in your home without having to sell the property. They differ from traditional mortgages, however. With a lifetime mortgage, there’s no need for affordability checks because you do not have to make monthly payments.

If you choose not to make payments then the interest is added to the loan each month, and it, in turn, also has interest charged on it. This causes the amount you owe to increase over time, and more rapidly the longer you have the loan. For example, at a rate of 6% fixed for life, a debt would double every 12 years.

The amount that you can borrow is often less than for a RIO. The lender uses your age and the value of your house and ensures that there is enough equity to absorb rolled up interest for your likely lifespan.

What’s the difference?

Retirement Interest Only:

• Because the interest is paid, the total loan doesn’t increase in size.
• More of your home’s value can be passed on to your family
• Traditional mortgage products that may be fixed for 2,3 or 5 years, providing flexibility, if you think you want to repay the loan early
• Lower set up costs
• Monthly interest payments are required

Equity Release:

• No compulsory monthly repayments (but voluntary payments are allowed)
• Interest can build up over time which reduces the equity in the home (a no-negative equity guarantee typically exists should the debt be higher than the property value at the end)
• Interest rates are typically fixed for life and early repayment charges often last for 10-15 years
• Fees for advice are often between £1,500 and £2,000 and you must have a specialist solicitor that will typically cost at least another £1,000.

Exploring your options

Choosing between a RIO mortgage and Equity Release depends on your personal circumstances, and you should always seek professional advice.  

We do not offer advice on equity release lifetime mortgages, but can advise you on our range of RIO Mortgages, which we believe offer a modern and responsible way to access the equity in your home during later life. Although not as widely known as equity release lifetime mortgages, they can provide valuable financial flexibility for those wishing to borrow into retirement. These mortgages can help individuals meet personal goals, such as supporting family, funding lifestyle choices, or managing estate planning.

It's important to be aware that your home may be at risk if you do not keep up with repayments.

Find out more

Get in touch today or take a look at our RIO mortgages to learn more.