Retirement interest-only vs lifetime mortgage

If you own your home and want to raise money in later life, two products are usually put in front of you. A retirement interest-only mortgage, often shortened to RIO, is a mortgage where you pay the interest each month for as long as you live there, and the amount you borrowed stays the same. A lifetime mortgage is a form of equity release where you pay nothing monthly, the interest is added to what you owe, and the debt grows until the home is sold.

The practical difference is what happens to the balance. With a RIO, the loan is repaid when you sell, move into long-term care or die, and the amount owed does not increase. With a lifetime mortgage, the interest due is simply added to the mortgage account, so the balance rises over time¹. Both are aimed at older homeowners, and both are repaid from the sale of the property.

Neither is a small decision. A lifetime mortgage can be more expensive than a standard mortgage, and the interest added to what you owe means the total debt can grow quickly². A RIO keeps the debt flat but requires a monthly payment you must keep up, and the home can be repossessed as a last resort if you do not³. This page sets out how each works, who can get one, how the loan is repaid, and where to get free help.

Two ways to borrow against your home in later life

Both products let you borrow money against your home while still living in it. The difference is in the repayment mechanics, and that difference drives everything else: the monthly cost, the size of the debt over time, and what is left for your estate.

A retirement interest-only mortgage is a way of borrowing against your property while only paying the interest on the loan each month⁹. You make interest-only payments each month for life, the loan amount stays the same with no roll-up of interest, and the loan is repaid when you pass away or move into long-term care⁴. Some RIO mortgages allow you to repay some capital as well as interest, cutting down the size of your loan over time¹⁰.

A lifetime mortgage works the other way. You borrow money against your home while still living there, but you do not need to make repayments; instead the interest is added to the mortgage and both are repaid when the home is sold⁶. You keep ownership of your home, and the interest on the loan is rolled up, or compounded⁷. Funds can come as a single lump sum or in smaller amounts over time¹¹.

A third shape sits between them. A drawdown lifetime mortgage charges interest only on the cash you have actually taken, with each withdrawal charged at the rate applying at the time, which can make these plans more cost-effective than taking everything at once¹².

A RIO mortgage keeps the debt the same; a lifetime mortgage lets it grow

The clearest way to see the difference is to follow the balance. On a RIO, you pay the interest as it falls due, so the capital you owe never changes. On a lifetime mortgage, the interest you have not paid is added to the account, and interest is then charged on that larger figure.

The Financial Conduct Authority's own definition of a retirement interest-only mortgage describes an interest-only mortgage which requires the interest accruing under it to be repaid in full over the stated term, entry into which is restricted to older customers above a specified age, and under which the lender is not entitled to seek full repayment of the loan until a specified life event occurs, unless the customer breaches their contractual obligations, including any obligation to pay interest during the term⁵.

That last clause matters. The lender cannot demand the whole loan back just because time has passed, but it can act if you stop paying the interest. A lifetime mortgage is defined separately: the lender will not seek full repayment of the loan, including any interest outstanding, until a specified life event occurs¹³.

Some RIO mortgages carry terms like a regular mortgage, repaid after a set number of years or when you reach a certain age, such as 90¹⁰. Others have no maximum term at all¹⁴. The lender's own terms decide which you are being offered, and it is worth reading that part closely.

Monthly interest or rolled-up interest: how each one behaves

On an interest-only mortgage, monthly repayments just cover the interest on the mortgage¹⁶. Those monthly repayments are lower than on a repayment mortgage, sometimes called a capital repayment mortgage¹⁷. The trade-off is that the capital is still outstanding at the end.

A RIO is interest-only only: monthly payments pay the interest charged, not the original amount borrowed¹⁸. Legal & General describes its own RIO as interest-only monthly payments, where the client pays the interest each month¹⁹. Family Building Society states that, unlike lifetime mortgages, its retirement interest-only mortgage does not roll up interest and there is no set end date²⁰.

A roll-up lifetime mortgage has no monthly payments at all; instead the interest is added to the amount owed each month⁶. Some lifetime mortgage plans let you pay some or all of the interest each month if you want, and if you do not, that interest is added to what you owe and compounds, or rolls up, over time¹⁵. The Equity Release Council makes the same point: with some plans, rather than roll up the interest, you can opt to make monthly repayments if you wish²¹.

So the choice is not simply "pay now or pay later". It is whether you want a fixed monthly obligation that keeps the debt still, or no monthly obligation and a debt that grows. A payment term lifetime mortgage sits in between: it lets clients aged 50 and over release equity and pay all the interest each month for a chosen payment term²².

Who can get one: age from 55 and affordability

Lifetime mortgages are generally only available if you are 55 or over¹. Most start from age 55, with some from 50 to 55 where monthly repayments are made⁴. You could get a special type of interest-only mortgage if you are over 55²³.

RIO lending is restricted to older customers above a specified age⁵. In practice, lenders set their own floors. One building society sets eligibility at over 55 years old, retired, able to demonstrate you can afford the monthly interest payments, and under 85 years old at the time of application for the youngest applicant²⁴. Another states it is available to those aged 55 years or older who are already retired²⁵. One lender offers a RIO available from age 50, whether you are working or retired²⁶.

Affordability is the dividing line. For new retirement mortgages or interest-only lifetime mortgages, affordability will also be considered⁶. One lender assesses affordability for payment term lifetime mortgages and retirement interest-only mortgages only, not for its roll-up and optional payment lifetime mortgages²⁷. Under the rules, a lender may assess affordability on the basis of payment of interest only over the term, and need not consider the cost of the repayment strategy as committed expenditure²⁸.

That is why a RIO is harder to qualify for than a lifetime mortgage: there is a monthly payment to prove you can meet. A lifetime mortgage with no monthly payments does not carry the same test.

How the loan is repaid: sale of the home on death or long-term care

Both products end the same way in most cases. The loan plus interest is repaid from the sale of the property, either on death, or second death, of the applicants, or a move into long-term care²⁹. The loan and any interest will be paid back either when you die or move into long-term care³⁰.

With most RIO mortgages, you only repay the loan when you sell your property, move into residential care or die¹⁰. One lender describes the mortgage continuing until a significant life event occurs, such as the sale of the property, the homeowner passing away or moving into long-term care³¹. Another states the mortgage is repaid from the sale of the home when the borrower passes away or moves into long-term care³².

For lifetime mortgages the same triggers apply. The loan and the rolled-up interest is repaid by your estate when you either die or move into long term care⁷. No monthly repayments are required, though some deals now allow them; the debt is repaid once you die or move into long-term care and the property is sold, and the debt grows over time, eroding the property's value¹⁰.

There is no specific end date for a RIO, and the client can repay it from the sale of their home when they die or move into a care home or another property³³. One lender states plainly that there is no loan term, and the mortgage lasts until the last borrower dies or moves out of their home into long-term care¹⁹.

Where a lifetime mortgage fits in the mortgage rules

The rules treat these two products differently, and the difference is not cosmetic. A lifetime mortgage is a type of interest-only mortgage, as full repayment of capital and interest is not required over the term, and the requirements applying to interest-only mortgages apply to lifetime mortgages unless specifically disapplied³⁴. The same wording appears in the current handbook³⁵.

A lifetime mortgage must be a regulated mortgage contract which is not a retirement interest-only mortgage, or an MCD exempt lifetime mortgage which is not a retirement interest-only mortgage³⁶. In other words, the two categories are defined against each other: if it is a RIO, it is not a lifetime mortgage for these purposes, and the reverse.

There is a specific consumer protection built into the RIO rules. Where a customer is looking to take out a retirement interest-only mortgage, the firm must inform the customer, either orally or in writing, that a lifetime mortgage may be available and more appropriate for the customer³⁶. The same requirement appears in the conduct rules³⁷. So a lender or adviser discussing a RIO with you is required to raise the lifetime mortgage alternative.

For lifetime mortgages only, the suitability rules require the firm to consider whether it is more appropriate for the customer to pay any fees or charges up front, rather than adding them to the sum advanced³⁷. Adding fees to the loan means paying interest on them for the life of the plan.

Risks to weigh before choosing and where to get help

The risks run in opposite directions on the two products, and both are real.

On a RIO, the risk is the monthly payment. You must pay the interest in full each month, and the home may be repossessed as a last resort if payments are not kept up³. The borrower has to pay the interest off monthly, but the full amount of the loan is not usually repaid until they die or move out of the home into long-term care³⁸. Interest-only mortgages are slightly more risky than repayment ones, because there is no guarantee that the proceeds from the endowment, ISA or other policy will cover the whole sum you borrowed in the first place³⁹. Switching to an interest-only mortgage is not a long-term solution: you only pay the interest and must pay the capital before the end of the term⁴⁰.

On a lifetime mortgage, the risk is the growing debt. Lifetime mortgages can be more expensive than a standard mortgage, with the interest often added to the amount owed, so the total debt can quickly grow². One lender lists the risks on its own roll-up product as: there may be cheaper ways to borrow money; the impact on any inheritance; releasing more later may cost more or less depending on the current interest rate at the time; and the effect on entitlement to means-tested state benefits⁶. A cash lump sum could affect tax liabilities, so it is worth getting information or advice on tax issues⁴¹.

Both reduce what you leave behind. Borrowing with a lifetime mortgage or a retirement interest-only mortgage will reduce the value of your estate⁸, and a lifetime mortgage reduces the amount of inheritance you can leave behind when you pass away⁴². Taking a lifetime mortgage will reduce the amount of inheritance you can leave⁴³.

If you are struggling with payments, free and impartial help exists. StepChange, Shelter and Independent Age all publish guidance on mortgage arrears and the options available, including the fact that some options reduce monthly payments now but cost more over the lifetime of the mortgage⁴⁴. In Wales, Shelter Cymru covers repayment options⁴⁵. The Financial Ombudsman Service can look at complaints about interest-only mortgages¹⁶ and about equity release¹.