There is a lack of general consumer understanding when it comes to the RIO and the strict criteria set by the regulator means many are not eligible for the product.
Mortgage Solutions spoke to 14 building societies about RIO mortgages and overall, lenders appeared to be content with the deal but they did give some insight into what could be addressed to complete more sales.
In the 18 months since the Financial Conduct Authority (FCA) gave retirement interest only mortgages the green light to be launched market-wide, the deals have made an underwhelming impact on later life lending with just 660 sold as of July 2019.
What could be changed
Keith Barber, director of business development at the Family Building Society, said he would like to see more of a change to how income such as pension drawdown, a major source of retirees’ income, is treated when it comes to working out affordability. Currently, only the income that is expected to last for the lifetime of a RIO is considered which rules out pension drawdown because retirees can withdraw it at whatever pace they choose. It is therefore not guaranteed to last until death.
He also said there was an opportunity for the insurance industry to develop a product that could insure borrowers or lenders in case there is a loss of income.
RIOs have been criticised for having restrictive affordability assessments. Single applicants must be able to afford a RIO mortgage even if it is a joint application, in case one of the borrowers dies.
Adjusting RIO criteria to assess affordability on joint income, similar to first-time buyers where the second borrower is also at risk of losing their income, was proposed by Tim Vigeon, head of lending at Buckinghamshire Building Society.
Aside from building societies that did not offer later life alternatives, almost all the lenders Mortgage Solutions spoke to said they often managed to find clients who were declined a RIO an alternative standard or lifetime mortgage from their range.
Both Nationwide and Scottish Building Society said they would not make any changes to the RIO product.
Lenders say they have tried to work within the “responsible” and “protective” boundaries of the RIO while introducing some flexibility. Some societies said they were either considering or had already made changes to the income they considered such as pension drawdown and rental income.
Despite the criticisms, the RIO was described as an important, much-needed later life offering and none of the lenders who responded had plans to withdraw the product.
Despite the FCA’s reclassification meaning advisers no longer need an equity release qualification to advise on a RIO, the apprehension of brokers to suggest the product for fear of not being authorised was also noted.
Melton Mowbray said the FCA needed to recognise advice issues while Barber added: “Some intermediary firms take the view that RIOs should only be sold by advisers qualified to sell equity release.
“This can limit the exposure of older clients to the availability of RIOs,” he said.
Vigeon echoed this by saying compliance officers needed to be very clear about what qualifications were needed.
Because of this, RIOs may potentially be falling into an advice gap where mainstream brokers avoid advising on it, while equity release advisers focus more on the offering they are specifically qualified to give.
Melton Mowbray also believed the worry of not giving holistic advice held brokers back, as the society said firms seemed “nervous or unhappy” to speak about RIOs if it meant they could not also speak about all the other options available to a client.
Going against borrowing nature
Louise Bunce, head of proposition and marketing at Ipswich Building Society, said regardless of a borrower’s eligibility for the product most had an “innate preference” to pay off the capital of the loan if they could afford it, especially where there are plans to leave the property as inheritance instead of it being sold to repay the mortgage.
She said: “If someone has a limited income, a RIO may not be affordable, and in this case equity release may be preferable.
“The flip side is also true that whilst someone would probably be accepted for RIO based on affordability checks, it wouldn’t necessarily be the right choice based on their circumstances.”
Barber said later life lending as a whole had evolved rapidly with the extension of age limits on mainstream mortgages and the flexibility of lifetime mortgages achieving “good outcomes”.
This is evident as between 2018 and 2019, the number of 40-year mortgages on the market rose 15 per cent to 2,782, Moneyfacts data found.
“RIOs compete with both of these more widely recognised mortgage types and such developments are shrinking the market for them,” Barber added.
However, Nationwide said this was good as following the expansion of its later life proposition, clients “valued the opportunity” to look at all the options side by side.
Karen Smith, sales manager at Newbury Building Society, also saw this as positive. She had seen an increasing number of borrowers helped with lending into retirement via mortgage streams outside the RIO offering.
Serving the niche
Bunce, said the fact it had not been widely served meant it was doing its job in only being sold to “the correct people under the correct circumstances” and not “promoted to the wrong audience”.
The RIO was also hailed as a specialist product which required careful thought and consideration while others were reluctant to see growth while uncertainty remained.
Some, including Matt Burton, managing director of mortgages at Hodge, said the product was still an unknown for many.
Recent data from Moneyfacts has shown that in the four months that the RIO was reclassified as a mainstream mortgage, just two providers offered a choice of five products.
The product also had a soft launch to market as some compliance teams had not authorised the product by its March 2018 launch date thus, putting a limit on the number of brokers who were able to sell it.
This has expanded vastly though and as of February 2020, 74 RIO products are available.
These numbers suggest growth is apparent but Matt Bartle, director of products at Leeds Building Society, said he anticipated the product to take time to gain market attraction and predicted it would take four to five years for a material increase to be seen.