Comparing lifetime mortgages with retirement interest only mortgages

If you want to release some equity from your home, it’s important to find a product that works for you. Here we look at the features, similarities and differences of lifetime mortgages and retirement interest only mortgages.

What’s a lifetime mortgage?

A lifetime mortgage is a type of equity release. It’s a loan that’s secured against your home, which allows you to release some money, tax-free. You could receive the money as a one-off lump sum or as smaller payments as and when you need them from a pre-agreed limit.

The loan isn’t usually repaid until you pass away or enter long-term care. If you have a joint lifetime mortgage, the loan isn’t repaid until you have both passed away or entered long-term care.

The loan is secured against your home and will reduce the value of your estate.

Want to see how much you could release? Try our lifetime mortgage calculator.

What’s a retirement interest only mortgage?

Retirement interest only mortgages are often called RIO mortgages. They allow you to take out a loan against the value of your home. You repay the interest every month, but not the loan amount borrowed.

The loan amount is normally repaid when your home is sold. This could be when you pass away or move into long-term care. If you have a joint RIO mortgage, the loan tends to be repaid when you have both passed away or entered long-term care.

The loan is secured against your home. If you don't keep up with payments, you could lose your home.

How are lifetime mortgages and retirement interest only mortgages similar?

They let you release money

Both lifetime mortgages and RIO mortgages allow you to unlock some cash from the value of your home. You can spend that money on almost anything you want. You could go on the holiday of a lifetime, help a loved one buy a home, manage your debt, or simply ease your living costs. When using equity release for gifting, the implications for inheritance tax is an area you need to carefully consider before going ahead, and you may wish to seek professional advice before making a decision. Equity release will reduce the value of your estate and may affect your entitlement to means-tested state benefits.

You get to stay in your own home

Whether you opt for a lifetime mortgage or a RIO mortgage, you can continue to live in the home you love. As long as you maintain your repayments (only relevant to RIOs), you can avoid moving or downsizing in retirement.

The mortgage has no set end date

Whereas standard mortgages have set terms, lifetime mortgages and RIO mortgages typically don’t. The loan amount is normally repaid when you or the last borrower, if borrowing jointly, pass away or move into long-term care. It can be hard to know when this will be, so the length of the term is open-ended.

How do lifetime mortgages and retirement interest only mortgages differ?

Paying interest

With a retirement interest only mortgage, you make an interest payment every month. With a lifetime mortgage, you don’t have to make any monthly payments - The interest and the loan are repaid when you pass away or enter long-term care.

With some products you can pay some or all of the monthly interest. This can help to lower the amount of interest that’s due when the term ends.

What it costs to repay the loan

The costs of repaying a lifetime mortgage and a retirement interest only mortgage can be quite different. As most people don’t make interest payments with a lifetime mortgage, the interest can build up over time. This means the cost of repaying could be more than with a retirement interest only mortgage, which requires monthly interest payments.

The difference in repayment costs could affect how much your loved ones inherit in the future.

Affordability checks

If you apply for a retirement interest only mortgage, the lender will need proof that you can afford the monthly interest payments. Having a good pension or income source can increase your chances of being approved.

With a lifetime mortgage, there are no affordability checks, but there are eligibility criteria. For example, with a Saga Lifetime Mortgage, you must be aged 55+ and own a UK property worth £70,000 or more.

Explore your options with Saga Money

If you’re keen to find out more about lifetime mortgages or retirement interest only mortgages, we offer both at Saga Money.

Saga Lifetime Mortgage

You could apply for a lifetime mortgage through Saga Equity Release. The service is provided by HUB Financial Solutions Limited, which is part of Just Group plc. You’ll need to pay an advice fee of £799 if you decide to proceed and take out a Saga Lifetime Mortgage.

Retirement interest only mortgage

You could apply for a retirement interest only mortgage through Saga Mortgages. The service is provided by Tembo, an award-winning digital mortgage broker. They will search the whole market for you to find you the best RIO deals.