What is the difference between equity release and pension interest-only mortgages?

There are several key differences between a retirement interest-only mortgage and a lifetime mortgage. These include:

When you take out a retirement interest-only mortgage, you make monthly payments to cover the interest owed. If you don’t meet your monthly interest payments on a RIO mortgage, there is still a risk of repossession, just as with a standard mortgage.

However, with a lifetime mortgage, you don’t have to make any monthly payments. Instead, the interest you owe accrues over time and is paid back, along with the amount of capital you owe, when you move into long-term care or die. As previously mentioned, the equity release plan in place from March 2022 allows you to make repayments if you wish, to help reduce the amount of interest payable when the property is sold.

• The amount you must pay

Because you typically don’t pay back any interest with a lifetime mortgage, and the interest is compounded, it can add up to a significant amount over time.

With a retirement interest-only mortgage, you’ll make interest payments indefinitely, so when you die or move and your loan has to be repaid, the payments will be less than if you chose a lifetime mortgage. This means you may have more remaining assets left for your heirs.

• Affordability assessment

When you apply for a retirement interest-only mortgage, your lender will ask you to undergo an ‘affordability assessment’ to ensure that you can afford your monthly interest payments. You still have to meet their specific criteria to be accepted into one of these deals, so depending on your circumstances, a retirement interest-only mortgage may not be an option.

However, an affordability assessment is not necessary if you are applying for a lifetime mortgage, as you do not have to pay anything until the property is sold.

Lifetime mortgages, along with other equity release products, are high risk and not suitable for everyone. Therefore, current regulations from the financial services regulator, the Financial Conduct Authority (FCA), require you to speak to a qualified financial adviser before you can take out an equity release product to ensure that it is appropriate to your circumstances. This is to ensure that you fully understand the long-term implications of taking an equity release product. An advisor will also be able to tell you how much your mortgage will likely cost over your lifetime. You can also use our lifetime mortgage calculator to give you a rough guide to the types of costs you may face.