MortgagesOct 2 2018

What you need to know about retirement interest-only mortgages

  • To learn about Retirement Interest Only mortgages
  • To understand when they are appropriate
  • To understand how they compare with equity release
  • To learn about Retirement Interest Only mortgages
  • To understand when they are appropriate
  • To understand how they compare with equity release
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What you need to know about retirement interest-only mortgages

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.

There is strong demand from older borrowers which is a major opportunity for advisers. But the challenge is to ensure customers explore all their later-life lending options, especially where disposable income is available.

Comparing the options

RIOs sit alongside interest-only and equity release and are another tool for the adviser to work with and make recommendations on. The first point to stress is that it is not an either/or decision.

RIOs are not available to everyone as affordability is an issue – customers without a large enough guaranteed lifetime income will be turned down.

In addition, if a couple applies, affordability will be considered for each individual. 

The MCOB amendments for RIO stress: “When assessing the affordability of a RIO with joint borrowers, the firm should consider the ability of a single borrower to continue making the required payments if the other dies, taking into account relevant evidence such as pensions payable to the surviving spouse or civil partner."

However, if clients need a relatively high LTV – and LTVs on RIOs go as high as 60 per cent – and they have a guaranteed income, then RIO may be the right option for them when equity release falls short of the LTV needed. 

Equity release offers a solution for many later-life borrowers, but some who are still earning an income and who want access to borrowing on mainstream mortgage terms may be more appropriately served with a RIO.

Many older borrowers have been excluded from borrowing in the past purely because of their age, despite having an income which would ordinarily enable them to borrow. The launch of the RIO tackles that issue, by enabling sale of property to be a viable repayment method in all cases, although rates are slightly higher than the standard mortgage terms.

And as we said, it is not an either/or decision – people’s circumstances change over time and it may feel more appropriate for some to choose equity release after taking out a RIO.

As with mainstream mortgages, RIOs will run for a fixed period, so it is conceivable that someone might come to the end of their RIO deal and decide that they don’t want to worry about making monthly repayments so move to an equity release plan.

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