For most experienced advisers within the equity release industry, this comes as no great surprise as mortgages that serve the older, interest-only borrower have been available for some time – in the shape of interest-only lifetime mortgages.
These plans have come in various guises – including the Hodge Retirement Mortgage, L&G’s Optional Payment Plans and the popularity of the flexible, voluntary payment plans where upto 15% of the original loan can be repaid each year without penalty.
To understand the reasons why RIOs haven’t taken off yet, we need to look at the fundamentals that must be in place for any product (in any market) to be successful. These are:
- Is it readily available?
- Is it fulfilling a need?
- Is it better than what’s currently available?
At the moment, RIOs cannot tick any of these boxes.
Fall at the first hurdle
First, they are not accessible to enough older borrowers, which needs to improve.
Lenders’ strict affordability criteria must be met, with the main issue for joint mortgagors being the affordability for any surviving partner in the event of first death.
Many applications are failing on this principle alone.
Currently there are fewer than 20 lenders offering RIOs and they are mainly regional building societies, without any real appetite for lending in volume.
Plus, interest-only lifetime mortgages meet the needs of this market in a variety of ways that RIOs simply can’t.
For example, the borrower does not have to pass affordability criteria and interest rates can be fixed for life.
Additional security is in place with a lifetime mortgage as the property cannot be repossessed for non-payment reasons.
As a RIO is a residential mortgage, this protection does not exist. If payments aren’t made, then borrowers could face the real possibility of homelessness.
Flip to roll-up
With a lifetime interest-only mortgage, the borrower can simply flip to a roll-up plan if they are struggling with repayments.
With a voluntary payment plan, they can pick and choose the amount and when they wish to pay off any balance – all without penalty.
Furthermore, the interest rates that RIOs currently offer just aren’t that competitive.
Interest-only lifetime mortgages are now available with APRs from 3.50 per cent, thanks to the current turf war amongst lenders, fighting for market share.
The best fixed rate RIO on the market offers an APR of 4.49%.
RIOs have not taken off because they simply aren’t good enough in either design or practice.
Will anything get the RIO party started?
Some commentators have suggested that the one of the big six lenders entering the market will be the kick start RIOs need, but simply coming with a nice bottle of wine does not make it a party.
RIOs need to change fundamentally and offer the flexibility and security that banks and building societies simply cannot offer through residential mortgages.
The reality is that lifetime mortgages have evolved over 20 years.
During that time, providers have innovated with features such as fixed lifetime interest rates, drawdown facilities, fixed early repayment charges, inheritance protection and flexible voluntary payments.
RIO providers should consider their own innovation, help customers to secure their homes and provide them with choices like their counterparts in the later life lending space.
Numbers of RIOs will inevitably increase as awareness grows, but sadly, unless these products change in design, I cannot see a future where RIOs will ever become home to a carnival.