Interest-Paying Lifetime Mortgages and RIO Mortgages: Differences and Risks

"Are you curious about the idea of interest-only equity release? You're not alone.

Here’s what we’ll cover today:

• Understanding equity release.
• Risk factors for your home’s equity.
• The true purpose of equity release.
• How to get a realistic quote.
• Paying interest when releasing equity.

We know that the process of equity release can seem tricky, but there’s no need to worry. We’re here to help, and we’ve got plenty of helpful tips and guides to walk you through it all.

We know equity release is a big decision, so you want to make the right choice for your home and your future. That’s why we make sure our advice is based on facts, not guesses. Stay with us, and let’s explore the world of interest-only equity release together.”

What is an interest-only lifetime mortgage?

An interest-paying lifetime mortgage and a retirement interest-only (RIO) mortgage are different products. A lifetime mortgage may permit optional interest payments or require them for a period; a RIO mortgage normally requires ongoing affordable monthly interest payments. See related guidance.

Check whether interest payments are voluntary or mandatory and what happens if they stop. A RIO mortgage is not a standard roll-up equity-release plan: missed required payments can put your home at risk.

If all interest is paid when due and no further borrowing, fees or charges are added, the capital balance stays level. The amount due can still change if other charges or additional borrowing apply.

Paying interest can reduce the eventual balance compared with allowing interest to compound, but it does not guarantee an inheritance. The adviser should compare affordability, inheritance aims, payment obligations and alternatives.

How much do I have to repay monthly with an interest-only lifetime mortgage?

Repayment flexibility depends on the product. Some lifetime mortgages allow optional repayments within limits; payment-term lifetime mortgages and RIO mortgages can require payments. Check the illustration and contract before assuming you may reduce or stop them.

Voluntary repayment options should not be confused with a contract that requires payments and an affordability assessment. Ask the adviser to explain the consequences of missed payments and any early-repayment charges.

Do you pay interest on releasing equity?

The most common method of equity release is a lifetime mortgage. When you take out a lifetime mortgage, the amount you release is subject to interest. The interest rate charged is usually fixed for the entirety of the lifetime mortgage. 

We discuss lifetime mortgages in detail shortly. 

What is the interest rate on equity release?

Rates change and depend on the product and your circumstances. Obtain a current personalised illustration and compare the APRC, fees, repayment options and total projected cost; this article does not quote a live market-leading rate.

When you search for a lifetime mortgage with your financial adviser they may show you an equity release calculator that projects your total debt over different time periods. These projections can be manipulated by making monthly repayments on the interest or not. 

Should I pay interest during my lifetime mortgage?

There may be arguments for and against using an interest-only lifetime mortgage over standard lifetime mortgages. Ultimately, a financial adviser should assess your specific situation to make a recommendation. Opt for an independent adviser who is regulated by the Financial Conduct Authority. 

By making interest repayments, you are keeping your total debt down and safeguarding more of your home’s value when it comes to being sold, which could significantly increase the amount you pass on to loved ones. 

A no-negative-equity guarantee is subject to the plan terms and normally applies when the home is sold to repay the loan. It is not a reason to stop required payments or assume voluntary payments can never be useful; seek advice before changing payments.

Repayment decisions should reflect your own finances, future care or moving needs and the contract, as well as inheritance wishes. Breaching required payment or other contractual obligations can put your home at risk.

What are the advantages of interest-only lifetime mortgages?

The benefits of choosing an interest-only equity release are:

1. The money you receive is not taxed.
2. You can receive it as a lump sum.
3. It can be spent on anything you prefer.
4. You can remain in the home while meeting the plan’s occupancy and other contractual conditions.
5. You can pay off some of the debt to pass on more of your property value to loved ones.
6. Optional repayment flexibility and mandatory payment obligations vary by product.

What are the disadvantages of interest-only lifetime mortgages?

The disadvantages of an interest-only mortgage of this kind are:

1. Interest-only lifetime mortgages are still expensive if you don’t continually pay 100% of the interest each month. 
2. Using them will reduce the inheritance you pass on regardless of making interest payments. 
3. You could stop being eligible for means-tested state benefits. 
4. Missing interest payments or underpaying can quickly cause your total debt to grow.