Compare later-life mortgages

Equity Release or a Retirement Interest-Only Mortgage?

A lifetime mortgage and a retirement interest-only mortgage can both allow borrowing in later life, but they work very differently. The most important distinction is whether you want—or can afford—to make required monthly payments. Understanding that difference can prevent a lower-looking rate from becoming the wrong solution.

The essential difference

With a retirement interest-only mortgage (RIO), you normally pay the interest each month. The original capital therefore usually remains broadly level, provided all required payments are made.

With a lifetime mortgage, there are generally no compulsory monthly payments. Unpaid interest is added to the balance and normally compounds over time. Many plans allow optional payments, but these remain subject to the product terms.

How a RIO mortgage works

RIO borrowing is assessed using income and expenditure. The lender must be satisfied that the monthly payments are affordable, sometimes on the income of the surviving borrower if it is a joint application. The mortgage is usually repaid when the property is sold following death, permanent entry into long-term care or another event specified in the mortgage terms.

Potential advantages:

Paying the interest can prevent the balance increasing.
Rates may be lower than lifetime-mortgage rates, depending on the market and circumstances.
It may preserve more equity if payments are maintained.

Points to consider:

Payments are compulsory.
You must pass affordability and credit assessments.
Repossession is possible if required payments are not maintained.

How a lifetime mortgage works

A lifetime mortgage is secured against the home. The loan and accumulated interest are generally repaid when the last borrower dies, enters permanent long-term care or the property is otherwise sold under the plan terms.

Potential advantages:

No compulsory monthly mortgage payments on a conventional roll-up plan.
Eligibility is not normally based on proving income in the same way as a RIO.
Lump-sum and drawdown arrangements may be available.

Points to consider:

Rolled-up interest can increase the debt substantially.
The plan reduces the value of the estate.
Early repayment charges and property restrictions may apply.
It may affect means-tested benefits or future financial choices.

Which option could be more suitable?

A RIO may merit consideration when dependable income comfortably supports the monthly interest and preserving equity is important. A lifetime mortgage may merit consideration when compulsory monthly payments would be undesirable or unaffordable, provided the effect of compound interest is fully understood.

The comparison should also include standard repayment or interest-only mortgages, downsizing and using other assets. Rates alone do not decide suitability: affordability, flexibility, future income, property plans and family objectives can be equally important.

Would it help to see what may be possible?

The homepage checker gives an initial indication of possible later-life borrowing routes. A proper recommendation would then compare affordability, projected balances, alternatives and the consequences for your estate.

Important: A lifetime mortgage is secured against your home. It will reduce the value of your estate and may affect entitlement to means-tested benefits. With a mortgage requiring monthly payments, your home may be repossessed if you do not keep up repayments. Advice should be based on your individual circumstances.