What Is A Retirement Interest-only Mortgage?

Posted 26 February 2019 by Nick Parkhouse

A retirement interest-only mortgage is one option if you need to borrow and you’re aged 55 or over. Here’s how they work…

A recent survey from L&G Mortgage Club found that three million homeowners in the UK will be paying their mortgage beyond the age of 65.

If you’re approaching retirement and you have a mortgage, you may be worried about your options – even if you’re comfortably meeting your repayments.

One option available to you is a ‘retirement interest-only mortgage’. But what is a retirement interest-only mortgage? How do they work? And where can you get one? Keep reading for answers to these questions, and we also look at a brand-new scheme that has been launched this month.

What is a retirement interest-only mortgage?

A retirement interest-only mortgage is similar to a standard interest-only mortgage in that your monthly repayments are made up of interest, rather than the capital that you have borrowed.

To be approved for this type of home loan you will have to prove that you can afford the repayments on a long-term basis. And, unlike a lifetime mortgage, you will have to make a monthly interest payment.

Additionally, rather than having a fixed term, a retirement interest-only mortgage is typically repaid when you die, enter long-term care, or when the house is sold.

This type of deal is aimed at the older borrower, and so you may find that there is a minimum age requirement of 55 or 60 to take out a retirement interest-only loan.

Buying a retirement home? Here are your mortgage options

How do the repayments on a retirement interest-only mortgage work?

As with a traditional interest only mortgage, your monthly repayment will consist solely of the interest on the amount you borrowed. Your monthly repayment doesn’t include any part of the capital itself.

You will still owe the original amount you borrowed at the end of the term. This is typically repaid from the sale of your home when you die or move into long-term care.

What are the advantages of a retirement interest-only mortgage?

There are several reasons why you might want to choose this type of arrangement:

  • You avoid ‘interest roll-up’. Under a lifetime mortgage you typically don’t make a monthly repayment. Instead, the interest is added to the amount that you owe which reduces the equity in your home. Here, you’ll pay a monthly interest payment and so the amount you owe won’t increase
  • There is no fixed term for the mortgage
  • You don’t have to prove that you have a repayment plan (such as savings or investments) as the mortgage will be repaid when you die, move into long-term care or sell the house
  • You don’t have to downsize or move home as long as you can continue to meet the monthly interest only repayments.

Read: Everything you need to know about getting a mortgage if you’re over 55

Where can I get a retirement interest-only mortgage?

There are several lenders that offer retirement interest-only products. The criteria range from lender to lender and typically include:

  • A minimum loan size
  • Maximum loan-to-value. You can typically borrow up to around 50-60% of the value of your home
  • A minimum age, typically 55 or 60.

Lenders that offer retirement interest-only mortgages include:

  • Leeds Building Society
  • Post Office Money
  • Shawbrook Bank
  • Aldermore Bank
  • Bath Building Society
  • Vernon Building Society.

In addition to these options, another major regional lender has now launched a retirement interest-only scheme. The Nottingham Building Society has added three retirement interest only (RIO) mortgage products to its portfolio, designed to help older borrowers.

The deals available are:

  • A seven-year fixed rate at 3.85%
  • A three-year fixed rate at 3.34%
  • A two-year discounted rate at 2.99%.

All the products have a £995 fee and come with a free valuation. There is a maximum loan-to-value of 40%, and the schemes are available for both purchase and remortgage.

Giving choice to retirees who want to live well

Research has found that retirees increasingly want to use their savings to enjoy a good retirement.

In a recent survey of retirees over the age of 50, The Nottingham revealed that 39% plan to spend their money whilst they are alive as opposed to leaving significant inheritance. 36% holiday three times a year and 39% class retirement as the best time of their lives.

Nikki Warren-Dean, head of Intermediary sales for The Nottingham for Intermediaries, says: “The addition of RIO mortgages to our portfolio adds choice for people in, or heading towards, retirement.

“Our research shows many people want to use their money to enjoy their retirement rather than having large amounts of capital tied up in their property. RIO mortgages can help, so we wanted them to be available to customers.

“It comes hot on the heels of our announcement last month to raise the maximum lending amount for 95% LTV mortgages from £275,000 to £500,000 - further highlighting our desire to be there for our customer’s mortgage needs whether it’s their first or last house.

As with all The Nottingham for Intermediaries products, RIO mortgages are provided exclusively via our broker network, so we have every confidence they will be supplied with expert advice and support to ensure it’s the right fit for the customer.”

The Nottingham retirement interest-only deals have no term and a minimum application age of 55. Your mortgage will be redeemed on the sale of your property following a life event such as death or going into long-term care. In the case of a joint mortgage, redemption will be when both applicants reach a life event.

Danny Belton, head of lender relationships at Legal & General Mortgage Club, adds: “The building society sector is playing a major role in helping both the first-time buyer and the older borrower.

“It’s great to see The Nottingham recognise the need for improved criteria and innovation for older borrowers with their new RIO mortgage range. As their research suggests, many customers will look to raise funds to help them enjoy their retirement.”


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