It is fair to say that it has not been plain sailing for RIOs since their inception.
Challenges around market awareness and understanding, how affordability and redemption is assessed and stressed, and the nervousness of compliance departments to venture into RIOs has resulted in a much slower take up than many initially imagined back in the summer of 2018.
Innovation roadblock
This is by no means a definitive list of factors that have impacted the distribution of RIO mortgages.
Another major factor is innovation and change in the equity release (ER) market over the last two years.
We have seen increased flexibility to service the interest on many ER plans, or even overpay, mitigating the debt compound effect.
We have seen rates, fixed for life, at an all-time low, and in many cases, cheaper than what you may be offered on an equivalent RIO mortgage. Today, many older clients will have their needs met by an ER solution.
Also, we have seen innovation in the mainstream residential later life mortgage market. Later life residential mortgages with a defined fixed term, remember that RIOs are a lifetime term by default, are very popular. The affordability stresses applied to these are not necessarily the same as those we see with RIOs.
In many cases, where a RIO affordability assessment fails, a defined term 50+ style mortgage can be counter-offered instead.
Today, many older clients have their needs met by these defined term residential solutions.
If the gap fits
So, it can be argued that since its inception the gap that RIO is targeted at – and where RIO is relevant – has narrowed. But there is still a gap. In certain circumstances, RIO is still the right answer.
Dependent on the borrower’s individual requirements, a RIO mortgage may be their only viable option and the only solution to meet their needs.
When I saw the headline that only 2,911 RIOs sold since 2018, I was pleased as that means 2,911 customers have been helped by this product who may not have been otherwise.
In fact, Hodge has seen a surge in the number of applications for RIO mortgages in the five months to the end of October 2020 compared to the first five months of the year.
We have also the seen average value of application increase in those five months as well. The average age of those taking out a RIO mortgage has also fallen throughout the year, and now stands at an average of 69, it was 72 this time last year. I believe having RIO mortgages available as an option – to fit the right customer, in the right circumstances – is a good thing and is beneficial to the consumer.
Far better to have different products for later life, than not having them available as an option at all.
Not a catch-all
RIOs are not the silver bullet to solve everyone’s needs, much like any financial solution isn’t, and they definitely still require work to increase their relevance and viability in this ER and mainstream mortgage dominated later life market.
Focus and attention by the regulator and lenders around affordability stresses and life event redemption strategies would help position RIO better.
We also need advice firms and their compliance functions to embrace RIOs for what they are, to look to understand where they fit, and offer a more holistic service.
I am confident that by all working together on these points we can provide even more great customer outcomes in the later life arena.
