In 2018, Retirement Interest Only Mortgages (RIOs) were introduced as a way for older homeowners to repay interest-only mortgages. Although this product has been less popular than predicted, this type of mortgage could still be a practical option for some people aged 55 and over.
In essence, a RIO is a standard home loan with a key difference; it does not have a set end date. It continues until the date of a “specified life event” occurs, such as the borrower’s death or if they have to move into a care home. The interest is paid off each month and the loan is eventually repaid once the borrower’s home has been sold.
What are the benefits?
Depending on your needs and personal circumstances, Retirement Interest Only Mortgages (RIOs) can work well for people who are looking for a mid-way product between a standard mortgage and a Lifetime Mortgage. And in some instances, if you or your client are looking for short-term products, this is where a RIO could work well.
Underwritten in a similar way, there’s also less of a tie-in with a RIO when compared to a Lifetime Mortgage. But the good news is that if you do not qualify for a RIO, you may still qualify for a Lifetime Mortgage.
What’s wrong with RIO mortgages?
In reality, very few people are being accepted for this type of mortgage. Retirement Interest Only Mortgages (RIOs) involve an affordability stress test on the first death of the highest earning spouse, which often makes this a non-starter for many at the outset.
From a consumer perspective, there is a lack of flexibility in terms of repayments and too much similarity to Lifetime Mortgages, so RIOs are simply failing to compete. With high interest rates at the start of the term with no certainty of future interest rates, RIOs are considered as counterintuitive by some mortgage brokers.
The original intention for this type of mortgage was to provide a ‘stepping-stone’ for older borrowers, who had interest-only mortgages. The FCA had become increasingly concerned by the number of borrowers forced to sell their home because they could not pay off the capital at the end of the mortgage term. So, in 2018, RIOs were introduced as a solution.
Retirement Interest Only Mortgages need to evolve
Across the industry, it’s widely agreed that current Retirement Interest Only Mortgages (RIOs) need to evolve if they are going to survive. Overall, it’s clear that consumers prefer a level of certainty when it comes to interest rates, which RIOs are currently unable to provide. As a result, clients are seeking peace of mind by opting for the fixed rates offered by Lifetime Mortgages instead.
One suggestion is to fix rates for RIOs for the long term, which would work well when interest rates are low. And if there’s a certain level of flexibility built in to reflect the borrower’s changing needs, this could switch over to rolled up interest once they reach the age of 75. Not only would this offer a solution to clients who might be facing affordability issues, but this would also ensure they can stay in their own home with flexible payments.
Another idea is to create a hybrid mortgage product that combines elements of a RIO with a Lifetime Mortgage. One solution could be to implement an approach where both types of plan work in combination, for example, should a client fail a RIO stress test, they would simply move to a Lifetime Mortgage plan.
It’s clear there is still a lot of room for improvement. Instead of opting for a RIO, you could consider a Lifetime Mortgage instead. This has a fixed rate for life and gives you the option to make your interest-only payments with more flexibility to stop, allowing the interest to roll up with the possibility to draw from a reserve, if needed.
Always get professional advice from an independent, whole-of-market mortgage broker before you commit to any type of mortgage product.
If you would like advice about a Retirement Interest Only Mortgage or Equity Release, please talk to our friendly team. Call 01455 238 650 or send us an enquiry.