RIO mortgages are a good stepping stone

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.

By February 2019, there were 38 RIO mortgages available from 12 providers, according to data from Moneyfacts.

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.

RIO mortgages are a good stepping stone for homeowners who have an interest-only mortgage that is coming to the end of its term Simon Gray,HUB Financial Solutions

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”.

Stepping stone

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.”

Compare and contrast

Clients who are considering whether a RIO mortgage is right for them may find that comparing them with lifetime mortgages helps in their understanding of how the product works and whether it meets their needs.

“Both RIO mortgages and lifetime mortgages allow people to tap into the value of their property in later life – for example, to boost income, provide lump sums for a range of reasons, such as holidays or home improvements, or to help with inheritance planning,” Mr Gray says, pointing out one of the similarities.

There are some crucial differences between the two mortgage products though – one of which is affordability.

Alex Edmans, head of retirement at Saga Personal Finance, explains: “The key difference from a lifetime mortgage is that a retirement interest mortgage requires monthly payments to cover the cost of the interest on the borrowing, so at the end of the loan only the original borrowing is repayable.”

She continues: “This means a retirement interest mortgage requires an affordability check at the time of application. It ensures the interest repayments are affordable for the lifetime of the loan, precluding some people from accessing the equity.”

But affordability is not a constraint for lifetime mortgages because there is no obligation to make repayments, making it accessible to a wider range of people, according to Mr Gray.

He says: “However, many of today’s flexible plans do give the option of making interest payments which reduces the speed at which the size of the loan rises. If borrowers’ circumstances change, they can stop paying interest or take a ‘payment holiday’ with no risk of losing their home – this is not the case with RIOs.

“Lifetime mortgage interest rates are fixed for the term, whereas RIO mortgages can change.”

Specialist advice

Later life lending often requires specialist advice and some advisers may feel that they are not best placed to discuss RIO mortgages.

In which case, passing the client onto an adviser with knowledge in this area will be the best way to ensure your clients are as well informed as they can be.

More2Life’s Mr Harris says that advice is crucial for anyone looking to borrow in later life.

“Specialist advisers are best placed to look holistically at a customer’s assets and finances, and guide them to the best solution for their particular circumstances,” he adds.

Clients can be reassured that, as Mr Gray explains, advice on lifetime mortgages is subject to some of the most stringent consumer protection in financial services, including a requirement for regulated advice and independent legal advice for the customer.