More customer choice is a good thing and RIO mortgages are an important option for borrowers who have a dependable income throughout their retirement.
So we welcome improved access to borrowing for older homeowners, but we believe there are still some issues that may not be addressed by RIO mortgages, even for those individuals who meet the affordability criteria.
Details matter
For instance, without a fixed interest rate for life, such as those available on lifetime mortgages, RIO customers will be exposed to interest rate rises during retirement.
Firms offering RIO products will also need to consider the effects of inflation on the borrower’s affordability as living costs will almost certainly increase throughout retirement.
Significant life events are also an important factor.
With joint customers, lenders need to consider carefully how the death of a spouse, or a move into residential care affects the income and expenditure of the remaining customer.
The same is true for customers who need to pay for domiciliary care during retirement, as this may mean they can no longer afford the interest payments.
Not the last mortgage
For many RIO customers it may not be the last mortgage they ever need, they may look to lifetime mortgages in later life for a lifetime solution.
With all that in mind, it’s clear that RIO mortgages won’t be a solution for everyone.
Not everyone in retirement has a secure, guaranteed pension income in later life, enough to pass stressed affordability assessments.
Pension reforms have enabled retirees to access their retirement funds from investments or pension drawdown.
This can create a more lumpy style income in retirement and, importantly, is far from guaranteed for life.
Regulator engagement
We see the FCA’s introduction of RIOs as a positive step and it demonstrates the regulator’s engagement in this market and willingness to work with the industry to improve access to mortgages in retirement.
It opens-up a new option for borrowers and allows lenders the opportunity to tackle the challenges of RIO not through product design, and by laying the foundations for new, innovative solutions that will help customers achieve better outcomes in retirement.
RIO is certainly a positive step, but it is just part of the solution for borrowing in retirement.
Hybrid model
In 2016, the regulator paved the way for a new generation of hybrid lifetime mortgages that allow customers to pay interest each month, but crucially without the need for an affordability assessment.
Interest rates will be fixed for life, meaning customers have certainty that the monthly interest payment will never increase and, if they could no longer pay or no longer wanted to pay, the customer could stop paying at any time and remain in their home for the remainder of their lives.
It’s with this type of product innovation that we see a real opportunity to meet the needs of borrowers, including those who still have to pay off an interest-only mortgage or those who don’t want a traditional interest roll-up lifetime mortgage.
Hybrid isn’t the only innovation we have planned, but we hope this and the FCA’s decision on RIO kickstarts wider innovation in the lifetime mortgage market to provide genuine flexibility for borrowers and to help them get the most out of later life.
