Lifetime Mortgage vs Retirement Interest Only Mortgage - what's the difference?

Posted by Knight Frank Newcastle on 27th November 2019 -

Our Later Life Finance expert David Forsdyke explains some of the key differences between two mortgage products used by older home owners; Lifetime Mortgages and the Retirement Interest-Only (RIO) Mortgage, which on the surface can appear similar.

The Later Life Finance market is steadily growing, and older homeowners are now faced with a huge variety of products, each with different features and benefits. Should you choose an Equity Release product, or one of the growing number of mortgage options for older borrowers? It can be confusing to sift through the options and identify the right solution, which is why you should always seek advice from a qualified adviser who can discuss all the mortgage options available to you, not just Equity Release. Here are just some of the key differences between the Lifetime Mortgage and the Retirement Interest-Only (RIO) Mortgage.

The amount you can borrow

• With a Lifetime Mortgage (the most common form of Equity Release), the amount you can borrow is based on your age and the value of your property. Your income is not assessed by the lender and if you have any medical conditions which might reduce your life expectancy you may be able to get an enhanced product, which means you’re either able to borrow more, or you’ll be offered a cheaper interest rate. For example, a 70 year old may be able to borrow up to 45% of the value of their property
• With an RIO Mortgage, the amount you can borrow is based on your income and your ability to meet the interest payments each month. The lender will carry out an affordability assessment, which means they will look at your income from all sources including your pensions and investments. They will also want to know about your regular expenditure. If you are a couple, the lender will want to know you can afford the payments individually, in case one of you passes away leaving the mortgage with the survivor. If you can afford it you will be able to borrow more than you would with a Lifetime Mortgage. For example, a 70 year old may be offered up to 80% of the property value

Monthly mortgage payments

• With a Lifetime Mortgage, you can make monthly payments if you want to, or you can allow the interest to roll up on top of the loan. You can choose to pay all of, or just part of, the interest each month. If you stop making the payments your mortgage will continue but on a roll-up basis.
• With Retirement Interest Only (RIO) Mortgages, you must make monthly payments. You are obliged to keep paying all of the interest each month. If you stop making the payments your home is at risk of repossession.

Your No Negative Equity Guarantee

• With a Lifetime Mortgage, as long as your lender is meeting the standards set by the Equity Release Council, you will be protected by a No Negative Equity Guarantee. This means you, or your estate after you die, can never owe your lender more than the value of your property.
• With a RIO Mortgage, if your property is worth less than the outstanding mortgage when the time comes to pay it back, you or your estate will have to make up the difference.

Your right to remain in your home

• With a Lifetime Mortgage, as long as your lender is a member of the Equity Release Council, you will have the right to stay in your home until you die or move out permanently into care, regardless of whether you make payments or not.
• With a RIO Mortgage your home is at risk if you don’t keep up with the monthly interest payments. However, if you do keep up the payments you can stay there until you die or move out permanently into care.

All of the above are subject to meeting and continuing to abide by the lender’s Terms and Conditions. For example, your mortgage lender will expect you to keep your home in a good state or repair. 

If you would like to know more about these or any other Later Life Finance products, please contact a member of our team. All Knight Frank Later Life advisers are qualified in Equity Release and will take the time to explain how everything works. You can contact us on 0203 918 7259 or visit our Borrowing Into Retirement pages.