What's the difference between a RIO and a lifetime mortgage

You may have come across terms like retirement interest-only mortgages and lifetime mortgages, especially if you’ve been looking for the right option for you. They’re very different products, and one may suit you better than the other. They have distinct characteristics and differ on monthly repayments, borrowing power, and financial considerations. Here’s everything you need to know:

What is a retirement interest-only mortgage?

A retirement interest-only (RIO) mortgage is a type of retirement-specific mortgage that is very similar to a standard interest-only mortgage. Unlike a typical interest-only mortgage, however, you only need to be able to prove you can afford the monthly interest payments, and the loan amount will be paid off when you die, move into long-term care, or sell the house.

Key features of a RIO

• No early repayment charges
• There is no fixed term
• No interest ‘roll-up’
• Easier affordability checks
• Borrowing is based on your retirement income and home value
• Repayments are mandatory

What is a lifetime mortgage?

A lifetime mortgage is a form of equity release, where you take out a loan secured against your home. The money you release is tax-free and yours to do with as you choose. You can either take out a lump sum or receive smaller amounts over time, otherwise known as a drawdown mortgage. 

Key features of a lifetime mortgage

• No monthly repayments unless you want them
• No-negative equity guarantee
• Retain homeownership
• Tax-free cash

What are the similarities between a RIO and a lifetime mortgage?

There are a few similarities between retirement interest-only and lifetime mortgages, but there are some important differences. For example: 

• You can stay in your home with both
• There is no set term
• There are eligibility requirements
• You can repay the interest on both (lifetime mortgages are optional)
• Both can be used to buy a property 

Both a RIO mortgage and a lifetime mortgage allow you the option to stay in your home rather than downsizing to release some cash. Unlike a standard mortgage, the value is only repaid when you die or move into long-term care. The remaining value of your property becomes part of your estate. 

Regarding eligibility requirements, both types of mortgages are aimed at homeowners over the age of 55, but specific terms will vary based on the lender.

Keep in mind that paying the interest each month on a retirement interest-only mortgage is mandatory. With a lifetime mortgage, you have the option of paying off the interest so it doesn’t compound over time.

What are the differences between a RIO and a lifetime mortgage?

Just like there are similarities, there are also a few important differences between a retirement interest-only mortgage and a lifetime mortgage. These include: 

• The amount you end up owing
• Rules around monthly repayments
• Affordability assessments and criteria
• The type of advice you’ll get

We’ve mentioned that when you take out a RIO, you make monthly payments for the interest owed. If you don’t keep up with these, there is still the risk that you’ll lose your home, just like you would with a standard mortgage. With a lifetime mortgage, you have the option to make payments. You could leave the interest to accrue or pay it off monthly if you choose. 

If you don’t make repayments on your lifetime mortgage, the amount you owe can build significantly over time. With a RIO, the amount you owe will always remain the same, and in both instances, the balance is paid back when you die or move into long-term care and the property is sold. Paying the interest means you could have more left in your estate for your beneficiaries, but the choice is a personal one. You may not be able to afford monthly repayments, in which case, a lifetime mortgage may be more suitable for you.

This forms part of the affordability assessments, and is another reason why you need expert advice. 

Which option suits you best?

Without knowing your personal circumstances, we can’t say exactly what is going to suit you best, but an adviser will work closely with you to ensure you’re getting the most appropriate result for your situation. This will depend on your finances, lifestyle, and long-term plans. Here’s a quick breakdown to get you started:

Getting expert advice

You have to speak to a qualified adviser before taking out any kind of equity release. This is to make sure that you fully understand how this will affect your finances in the long-term. An adviser will be able to tell you how much a lifetime mortgage is likely to cost over your life and whether it suits you. 

Talk to a qualified adviser today to get more information about what’s going to work best for you.