The retirement interest only (RIO) revolution is underway in the booming later life lending market, with new lenders launching RIO mortgages and increasing customer options while equity release continues to expand at record rates.
The Financial Conduct Authority (FCA) gave the green light for RIOs in March when it redefined them as standard mortgages, and lenders have been quick to respond with a range of new options already available.
Bath and Vernon Building Societies were both quick to launch with RIOs and have been followed by Hodge Lifetime, Tipton and Coseley Building Society, Leeds Building Society, and recent launches from Swansea Building Society and Scottish Building Society among others.
So far loan-to-values (LTVs) go to 60 per cent and there are discounted, variable rate, and fixed rate deals with maximum loans as high as £1m.
The minimum age to qualify starts at 55, with some lenders specifying 60 or 65.
At the same time standard mortgages are changing. The Post Office is offering an interest-only mortgage for customers with a maximum age of 80 and a repayment mortgage with a maximum age of 90, with Aldermore offering maximum ages of 99 for its Later Life Lending mortgage range.
The Nationwide has said it plans to launch a RIO, although it has not set a date or given any more details. The Building Societies Association says 27 societies attended a roundtable with the FCA to discuss RIO, so clearly there are more launches to come as lenders work through the practical and technical challenges of the rule change.
Other equity release lenders are also likely to be among the organisations launching RIOs or hybrids of RIOs.
Diversification to meet growing customer needs
It all adds up to improved access to borrowing for older customers, which is to be welcomed as there are a significant number of challenges. There is more focus than ever before on using housing equity to improve people’s standard of living in retirement and an increased drive to solve the problems faced by those with interest-only shortfalls.
There are currently around 1.67 million full interest-only and part capital repayment mortgage accounts outstanding in the UK, according to the FCA. They represent 17.6 per cent of all outstanding mortgage accounts and, over the next few years, increasing numbers will need to be repaid in full.
RIOs can help those borrowers who need extra time to repay their capital balance, or who want to use the sale of their home – on either death or a move into long-term care – to clear their balance.
This represents a potentially huge market and it is one that equity release is already helping to address. Around a fifth (22 per cent) of customers in the first half of 2018 used some or all of the money to clear existing mortgages.
Total equity release lending for this year is likely to hit a new milestone of £4bn, with total lending expanding by 30 per cent, although 40 per cent growth is entirely possible.