Retirement interest-only mortgages may not be achieving their purpose as experts say target clients are struggling to access the products.
Data from the Financial Conduct Authority showed a mere 241 consumers opted for a Rio mortgage in the first quarter of this year — bringing the total number of Rios taken out in the first year since the FCA’s changes to 353.
Rios were given the green light by the FCA in March 2018 when the regulator decided to treat them as standard mortgages rather than under equity release standards in an effort to increase their uptake in the market.
This meant the regulatory barriers that surrounded traditional lifetime mortgages — such as an advice requirement and strict affordability tests — no longer applied to Rios.
Rio products were touted as the solution for consumers who had an interest-only mortgage set to mature but no plan for how to pay the capital left in the property.
In May 2018, UK Finance reported there were 1.7m interest-only mortgages outstanding in the UK with around 200,000 due to mature by 2020.
But Rebecca O’Connor, personal finance specialist at Royal London, said Rios could give “false hope” to hundreds of thousands of borrowers as they would struggle to meet the affordability criteria for the Rio.
To be eligible for a Rio, consumers must prove they can afford the interest payments for the rest of their retirement — including if one person passes away or moves into care if opting for a joint policy.
Ms O’Connor said official figures showed about 12m people were not saving enough even to cover basic living costs after they retire and therefore very few would be able to afford the cost of servicing mortgage debt in addition to this.
Royal London estimated someone on average earnings would need a pension pot of around £260,000 to maintain their standard of living, assuming they had paid off their mortgage.
But the insurer calculated they would need an extra £118,256 to service a debt of £121,000 (the average outstanding balance of an interest-only mortgage according to the FCA) throughout their life.
Ms O’Connor said: “Even those who have a ‘decent’ pot size of £260,000 might find they wouldn’t have enough income in retirement to pay Rio mortgage repayments and still maintain a decent standard of living.
“It’s likely that any uptake of Rios will therefore be reserved for those endowed with the most generous pensions, or income from other sources such as property or work.”
Kay Ingram, director of public policy at LEBC, and Graham Walters, partner at UK law firm TLT, raised concerns about how changing circumstances could result in elderly and vulnerable borrowers having their homes repossessed.
Mr Walters’ law firm is involved in a partnership aiming to help lenders manage customers on interest-only mortgages that are at or reaching maturity.
He said: “A potential issue for both lenders and their customers is what will happen if circumstances impact the ability to make the interest payments on a Rio mortgage.
“Both the lender and customer will have to consider how to deal with that position. The last resort for the lender would be to take proceedings for possession but, when faced with an elderly and potentially vulnerable customer, this approach would have to be carefully considered.”
Ms Ingram thought this was a real problem that raised the possibility of “repossession” and “bereaved and elderly people being forced to move home”.
She added that Rio mortgages were simply “kicking the can down the road” in regards to the problem of interest-only mortgages.
But Rio provider Hodge has defended the product after its own data found only a fifth (21 per cent) of Rio mortgage holders had taken out the mortgage to consolidate debt.
About one in 10 (12 per cent) did so to give gifts to family members, while 13 per cent used the mortgage to purchase another property and 7 per cent funded home improvements.
Managing director for mortgages at the lender, Matt Burton, said: “Rio mortgages have the potential to fulfil a key need in the retirement market, providing lenders continue to evolve their offerings based on what customers want.
“Those who view Rio mortgages as just an additional step toward equity release aren’t considering the full-potential of them.
“It’s important to remember that the Rio market is still incredibly young and needs time to develop based on customer feedback and demand.”
imogen.tew@ft.com
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