Lifetime Mortgages vs Retirement Interest Only Mortgages: Understanding Your Options
As you approach retirement, you may be considering options to help supplement your income. Two popular options for homeowners aged 55 and over are lifetime mortgages and retirement interest-only mortgages.
While both products allow you to access equity in your home, there are some key differences between the two. In this article, we’ll compare lifetime mortgages and retirement interest-only mortgages so you can make an informed decision about which product is right for you.
Page last updated – 5th March 2023
A lifetime mortgage is a type of equity release that allows you to borrow money against the value of your home. You can typically borrow between 20% and 60% of the value of your property, depending on your age and health.
The loan is secured against your home, and interest is added to the balance over time. You can choose to receive the funds as a lump sum, regular payments, or a combination of both.
- Access to Tax-Free Cash: One of the main advantages of a lifetime mortgage is that it allows you to access tax-free cash without having to sell your home or downsize. This can be especially beneficial if you need a lump sum to pay for home improvements, travel, or other expenses.
- Flexible Options and Customization: Another advantage of a lifetime mortgage is that it offers flexibility in terms of how you receive the funds and how you repay the loan. For example, you can choose to receive a lump sum, regular payments, or a combination of both. You can also choose whether or not to make interest payments, which can affect the amount of equity left in your property.
- Interest Rates and Repayment: One potential drawback of a lifetime mortgage is that the interest rates can be higher than those of traditional mortgages. In addition, the interest is added to the balance over time, which can reduce the amount of equity left in your property.
- Impact on Inheritance: You’ll also need to consider the potential impact on your inheritance, as the loan will need to be repaid from the proceeds of your estate when you pass away. This means that there may be less money left to pass on to your loved ones.
- Legal and Financial Considerations: Before taking out a lifetime mortgage, it’s important to seek legal and financial advice to ensure that you understand the risks and benefits of the product. You’ll also need to consider the potential impact on your inheritance and whether a lifetime mortgage is the best option for your financial situation.
Retirement Interest Only Mortgages (RIO)
A retirement interest-only mortgage is a type of mortgage where you only pay the interest on the loan, and the capital is repaid when the property is sold.
This type of mortgage is available to homeowners aged 55 and over, and can be a good option for those who want to continue living in their home without having to make full mortgage repayments.
- Lower Interest Rates: Retirement interest-only mortgages tend to have lower interest rates than lifetime mortgages, which can save you money in the long run.
- No Impact on Inheritance: With a retirement interest-only mortgage, you won’t need to worry about the impact on your inheritance, as the loan will be repaid from the sale of the property.
- Option to Downsize: If you do decide to downsize in the future, you can use the proceeds from the sale of your home to pay off the loan.
- Repayment: With a retirement interest-only mortgage, you’ll need to make sure that you have a plan in place to repay the loan when the property is sold. This can be a concern for some homeowners.
- Eligibility Criteria: Retirement interest-only mortgages are only available to homeowners aged 55 and over, and there may be additional criteria that you’ll need to meet in order to be eligible for the product.
For example, you may need to have a certain level of income or a minimum amount of equity in your property.
When considering which product is right for you, it’s important to compare the features and benefits of each. Here’s a quick comparison:
- Access to tax-free cash without selling your home or downsizing
- Flexible options for receiving funds and repaying the loan
- Higher interest rates and potential impact on inheritance
Retirement Interest Only Mortgages:
- Lower interest rates and no impact on inheritance
- Repayment required when property is sold
- Eligibility criteria and potential need for additional income
Both lifetime mortgages and retirement interest-only mortgages can be viable options for homeowners aged 55 and over who want to access equity in their home. Ultimately, the best choice will depend on your individual circumstances and financial goals.
It’s important to seek professional advice and carefully consider the benefits and risks of each product before making a decision.
If you would like to find out how much money you might be able to get you can use our free equity release calculator. No personal details are required to use it so you don’t have to worry about anybody calling you.