Equity release and retirement interest-only mortgages compared

How retirement interest-only mortgages work

Cropped shot of a senior couple spending quality time together at home

Equity release and retirement interest-only mortgages both enable older homeowners to borrow into retirement, but they each work in fundamentally different ways.

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Although both types of scheme are available to homeowners aged 55 or over, allowing them to access some of their property wealth, that’s pretty much where the similarities between the two end. Here, we explain how equity release and retirement interest-only work, and why it’s essential to seek advice if you’re considering taking either route.

How retirement interest-only mortgages work

Older homeowners can find it difficult to get a standard residential mortgage, as retirement is often when their income falls, which can make it more difficult for them to meet their monthly repayments.

Retirement interest-only mortgages were introduced relatively recently to help older borrowers, as they allow you to borrow against your home, and as the name suggests, only to repay some of the interest you owe each month, and not any of the capital. The capital must usually be paid back when you move into long-term care, sell your home, or die, although there are some retirement interest-only mortgages which require the capital to be repaid by the time you reach a certain age, for example, 85 or 90.

As you’ll have to pay back some interest each month, you must be able to demonstrate to the lender that you can afford these repayments, so you’ll have to go through affordability and credit checks, and if you miss any payments, there’s a risk your property could be repossessed.
According to financial website Moneyfacts.co.uk, the number of providers currently offering retirement interest-only mortgages stands at 22. This is nearly double the number available two years ago, when there were just 12 providers offering these types of mortgages. There are 109 retirement interest-only mortgage deals to choose from, up from 38 in early 2019.

“Overall, it is inherently positive that those considering a RIO mortgage now have not only a greater choice of products, but also from a greater choice of lenders,” said Eleanor Williams, finance expert at Moneyfacts.co.uk. “However, borrowers considering a RIO mortgage should secure qualified, independent advice to ensure they are picking the right type of product for their circumstances. Equity release, down-sizing and other options may be valid alternatives, so having the knowledge and support of a professional in making their choice would be vital.”

How equity release works

Equity release involves homeowners unlocking some of their property wealth, which can be used to boost their retirement income, make home improvements, help family, or any other reason.

Rather than repaying the interest on the capital borrowed each month, instead interest rolls up over time. It only must be repaid, along with the original amount borrowed, either when you die or move into long-term care.

Some equity release products, however, do allow borrowers to repay some of the interest they owe if they want to.

Provided you take out an equity release plan with provider who’s a member of the Equity Release Council, you’ll have a ‘no negative equity guarantee’. This means that even if property prices fall and your home is worth less than the amount you’ve borrowed, you’ll never owe more than the value of the property when it is sold.

However, it’s worth noting that taking money out of your home will reduce the value of any inheritance you might have been planning to leave your loved ones, and it may affect your entitlement to some means-tested benefits.

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