Analysis by retirement interest only (RIO) lender LiveMore Capital found that if term assurance policies, or life cover, were written to cover the cost of repaying part or all of the mortgage balance in the event of the higher earner’s death, eligibility for RIO loans would increase by 36 per cent.
LiveMore changed its lending policy in December to allow borrowers to take out a life policy to bridge an affordability gap preventing couples from being approved. The policy, which can be taken at the time of the RIO application, must run until the higher earner’s 90th birthday.
The monthly premium must fit within the couple’s monthly budget and the policy does not have to be assigned to LiveMore.
To be accepted for a RIO mortgage, borrowers aged 55 and over must both prove they can afford the full mortgage payment on their sole retirement income should one of the partners die. This requirement has been blamed by brokers as one of the main reasons retirement interest only mortgages have failed to take off.
Alison Pallett (pictured), sales director, LiveMore Capital, said: “The death-of-the-first-borrower stress test for joint applicants looking for a RIO mortgage is often given as one of the biggest barriers to why this product hasn’t taken off as well as the Financial Conduct Authority (FCA) expected when it made the amendment to its rules in 2018.
“With historic pension planning often seeing one applicant with a greater level of retirement income than the other, traditionally the husband, this is no real surprise.
“In a market always calling for innovation the introduction of term assurance to bridge this gap is a bold move.”
LiveMore isn’t the only lender to use life cover to overcome RIO affordability issues although it has one of the most flexible approaches.
Family Building Society has a similar approach to LiveMore but Hodge insists the term assurance policy is in place for at least three months before the mortgage application is made.
Tipton & Coseley Building Society uses term assurance policies but only if they are written to cover the whole loan, not just the part which makes the mortgage unaffordable on the lower earner’s income.
Leeds Building Society and Nationwide will not accept term assurance policies.
Sami Bickford, managing director of The Equity Release Lady, said: “The term assurance option is a step in the right direction for RIOs.
“Considering a life insurance policy where income or mortgage affordability falls short, to bridge the gap on the first person’s death, will enable more borrowers to be considered for a RIO mortgage.
“Livemore provides innovative changes to the RIO market and has shaken up the industry so that it provides new and improved products to our clients.
“But although a RIO mortgage with a term assurance policy sounds great on paper, if the term assurance premium is not affordable for the entire term this would not work.
“If the cost of this monthly premium is assessed as expenditure this is likely to reduce affordability further.”
Bickford says there is also a “huge gap in the market” for affordable life cover for older equity release borrowers.
In cases where one borrower is too young for equity release but the older partner is eligible, an equity release mortgage can be offered in a sole name. A whole of life policy can be taken out by the older partner so that when they move in to long-term care or die the younger homeowner, who was not party to the equity release debt, would not have to sell their home to repay their spouse’s mortgage. The life policy pay out could be used instead.
But as whole of life policies for older borrowers can cost as much as £300 a month, it is not usually a viable option for homeowners to consider.
Bickford said Canada Life is currently the only lender that will offer an equity release mortgage in a sole name, when the property jointly owned.