Back in March 2018, the Financial Conduct Authority announced a reclassification of retirement interest-only mortgages so that they no longer came under equity release standards and would instead be treated as standard mortgages.
The regulator stated that it envisaged retirement interest-only mortgages “as an additional option alongside downsizing or equity release” and added that it would restrict the sale of them to borrowers above a certain age.
Throughout the rest of 2018 and into 2019, a few lenders – mainly building societies – launched retirement interest-only products as an additional option for those in later life.
The market has grown since then and borrowers now have a wider range of RIO mortgages to choose from. Moneyfacts reports that there are a record 87 RIO products from 20 providers available currently.
As Simon Gray, managing director of HUB Financial Solutions notes, RIO mortgages were introduced to “help address the ‘ticking timebomb’ of interest-only borrowers heading into retirement without the cash to pay off maturing loans”.
RIO mortgages allow homeowners to pay off only the monthly interest on their mortgage, with the mortgage paid off in full from the sale of the house when the borrower dies or goes into long-term care.
“Generally, Rio mortgages are a good stepping stone for homeowners who have an interest-only mortgage that is coming to the end of its term, but cannot cover the capital repayment and may find it difficult to get a standard residential mortgage,” explains Dave Harris, chief executive of more2life.
“These products allow retirees to borrow against their property and pay back the interest – not the loan itself – each month.”
Although there is a growing ageing population in the UK, it has taken some time for RIO mortgages to gain traction.
Mr Gray says: “Take-up of RIOs has been subdued – reports suggest less than 1,000 were sold during 2019 compared to 85,000 equity release customers.”
One of the reasons could be that RIO mortgages are only suitable for a narrow range of borrowers.
“The lender still needs to make rigorous checks that borrowers can afford to pay the interest over what could be many decades. For a couple, this means a surviving partner being able to afford to pay from their own resources,” he explains.
Even among those clients who can show higher secure pension incomes and better credit histories, Mr Gray suggests they probably have access to alternative solutions and are therefore unlikely to consider a RIO.
More2life’s Mr Harris notes: “While some people are lucky enough to have that type of stable surplus income well into retirement, this is not the case for everyone, so they may be better suited to an equity release product.”