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.”
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.