Retirement Interest-Only Mortgages Explained
This guide is for general information only and does not provide financial advice. Check your lender’s terms before overpaying, as early repayment charges may apply. Your home may be repossessed if you do not keep up repayments on your mortgage.
With an interest-only mortgage your monthly payment generally covers the interest, and the amount you borrowed generally stays the same. A retirement interest-only (RIO) mortgage is generally described as an interest-only mortgage designed for older borrowers, where the loan is usually repaid later, for example when the home is sold. Lenders set their own rules for who can have one and what happens at the end, so this page gives only the general idea and an example of the numbers. It is not a description of any lender’s product.
How the payments compare
The table compares the monthly payment on an interest-only mortgage with a repayment mortgage over 15 years, at an example rate of 4.5%. Both use the same balance and the same example rate. The table compares interest-only with repayment in general; it is not a model of a retirement interest-only product, which usually has no fixed end date.
| Balance | Interest-only payment | Repayment over 15 years | Balance still owed after 15 years, if every payment is made at the example rate |
|---|---|---|---|
| £100,000 | £375.00 a month | £764.99 a month | the full £100,000 if nothing is repaid; nothing with repayment |
| £150,000 | £562.50 a month | £1,147.49 a month | the full £150,000 if nothing is repaid; nothing with repayment |
| £200,000 | £750.00 a month | £1,529.99 a month | the full £200,000 if nothing is repaid; nothing with repayment |
In this example the interest-only payment is lower because it covers only the interest. The balance that remains still has to be repaid at some point, and how that happens depends on the mortgage.
What overpaying could do
On an interest-only mortgage, reducing the balance usually reduces the interest charged on it. The table assumes interest is the balance multiplied by the rate divided by 12, that the rate stays at 4.5%, and that your lender accepts the reduction without a charge. Whether your lender lets you make overpayments, and how they are treated, depends on your mortgage. The table shows the effect on the monthly interest of a one-off reduction in the balance, at 4.5%.
| Balance | Monthly interest now | After paying off £10,000 | After paying off £25,000 |
|---|---|---|---|
| £100,000 | £375.00 | £337.50 | £281.25 |
| £150,000 | £562.50 | £525.00 | £468.75 |
| £200,000 | £750.00 | £712.50 | £656.25 |
Questions worth asking
- How and when would the loan have to be repaid, and what would you rely on to repay it? Check the terms of any mortgage you are considering.
- What happens to the balance if your circumstances change, for example if you move or need care?
- Would your estate or the people who inherit from you be affected? Mortgages secured on your home can reduce what is left.
- Can you overpay, and what are the limits and charges? See the UK mortgage overpayment cap and what an early repayment charge is.
Interest-only borrowing in later life is an area where lenders have their own rules. Consider speaking to a regulated mortgage adviser before deciding. Your home may be repossessed if you do not keep up repayments on your mortgage.
Free, impartial guidance on mortgages, pensions and retirement is available from MoneyHelper (moneyhelper.org.uk).
Figures are estimates from this site’s calculator, using the assumptions stated above each table. The rates, costs and property values shown are examples, not figures that are available to you. They are illustrations, not forecasts. Try your own figures in the free mortgage overpayment calculator.
If you are thinking about your mortgage and retirement, consider speaking to a regulated mortgage adviser, and to a pension or retirement adviser about any use of pension savings. This page is general information, not advice on your circumstances.
Questions people ask
What is a retirement interest-only mortgage?
It is generally described as an interest-only mortgage for older borrowers, where you pay the interest each month and the loan is usually repaid later, for example when the home is sold. Lenders set their own rules, so check the terms of any mortgage you are considering.
Is the interest-only payment lower than repayment?
The monthly payment is lower in the example above, because it covers only the interest. The balance does not fall, so it still has to be repaid, and the overall cost depends on how long the loan runs and on what happens to the balance.
Can I overpay on an interest-only mortgage?
It depends on your lender and mortgage. Check your mortgage offer or ask your lender. You may want to speak to a regulated mortgage adviser.
Related guides
paying off your mortgage before retirement, remortgage or product transfer after overpaying. See also overpaying your mortgage after 55, overpaying your mortgage or saving in an ISA, what happens to overpayments when you remortgage and when to speak to a mortgage adviser.