From a lending perspective this has long been an area of opportunity, but also one which providers have previously shied away from due to a mix of complexity, risk, appetite and regulatory boundaries.
However, times are changing. In terms of demand and innovation, forward strides have been made with equity release products growing in number and interest rates falling.
Regulatory shifts have also influenced certain areas within this marketplace.
In an effort to broaden product choice in the later life lending sector, the Financial Conduct Authority (FCA) now treats Retirement Interest-Only (RIO) mortgages as standard mortgages, instead of being regulated under equity release rules.
This factor, among others, has resulted in several lenders adding retirement interest-only mortgages to their portfolios.
With this in mind, let’s take a brief look at some of the basics surrounding this product and how it might work in practice for your clients.
What is a RIO mortgage?
Simply put a RIO mortgage allows homeowners to pay just the interest on their mortgage. The remaining capital of the loan is paid off in the event of:
- A sale of the property
- The homeowner having to move into residential care
- The individual finding alternative accommodation, such as moving in with family
Benefits of RIOs
Flexibility – it can allow homeowners to make overpayments with no penalties. They can also make regular repayments by increasing monthly direct debits or make a lump sum payment to help decrease the amount of interest they pay.
There is no maximum age across many of these products, and rates are becoming more competitive.
What to be aware of
RIO mortgages are generally only on offer to applicants who are already retired, not to those who are close to retirement.
For joint applications, each applicant should be able to afford the total repayment individually.
Although it is not a rule, it’s prudent for borrowers to have Lasting Power of Attorney (LPA) in place when considering taking out a RIO mortgage. This can often be done through their own solicitors and there is also an opportunity for intermediaries to support better clients in this area.
Aligned with mainstream
Despite lending into later life becoming ever more aligned with the mainstream mortgage market there remain clear differentiators, and there is an even greater emphasis on the importance of the holistic advice process.
To continue this positive forward momentum, it’s evident that providers, trade associations, the regulator and the intermediary community must work even closer to generate and advise on appropriate solutions which cross these lending boundaries.
That way all ages within the mortgage chain will stand to benefit.