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Affordability issues holding back RIO mortgages ‒ analysis

  • 30/11/2021
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Affordability issues holding back RIO mortgages ‒ analysis
Retirement interest-only (RIO) mortgages will remain a niche product, so long as tough affordability rules are utilised by lenders on cases where there are joint borrowers, brokers have said.


Figures from UK Finance this week showed that in relative terms there has been a notable jump in RIO completions of late, moving from 436 in the first quarter of the year to 748 in the third quarter.

However, these numbers remain low in comparison to the rest of the mortgage market, with advisers suggesting that affordability issues remain the big barrier to a greater take-up of RIO products.


RIO is unaffordable on one income

Sami Bickford, managing director of The Equity Release Lady, suggested that RIO mortgages are held back by lender criteria which requires couples to prove that the loan is affordable on each of their individual incomes, and warned that until this changes the product will never take off.

She added: “I have done one RIO in the past two years for this reason. It is more often than not the case that a RIO is unaffordable based on one applicant’s sole income.”

Bickford pointed to lifetime mortgages as a more accessible alternative, and argued they do the job well of filling the gap when affordability in later life may prove an issue.

Dominik Lipnicki, co-owner of Access Equity Release, agreed that RIOs suffer from a “very limited appeal” because the necessity to prove income throughout retirement means so few borrowers qualify for them.

He also pointed to changes in the standard residential market, such as lenders becoming more flexible over the age of borrowers, which has further dented the niche served by RIO mortgages.


Numbers double but RIO remains niche

David Lownds, head of marketing and business development at Hanley Economic Building Society, said that while the mutual has seen its RIO lending double over the last 12 months, it remains a “niche lending segment”.

He also pointed to the way that affordability is handled when there are two applicants, noting that in many cases one applicant’s retirement income is much greater than the other, which restricts the amount that they can borrow.

He continued: “There has been an increase in the awareness and positioning of the product. However, there is still some way to go before that knowledge will spread across the full intermediary market. At Hanley Intermediaries, we have undertaken a number of RIO sessions at club and network events to increase the awareness of the product as best we can and we will continue on this educational journey in 2022.”


RIO can’t compete with equity release

Lipnicki pointed to the growth of the equity release market as a reason for RIO mortgages struggling to take off.

“Low rates, ease of application, no need to prove income, the choice of a lump sum or drawdown facility ‒ or both ‒ options to pay interest or roll up. All of these features make equity release attractive to many homeowners,” he concluded.

Bickford cautioned that it was crucial for brokers to ensure their later life clients are provided with all of the possible options, warning that if they are not qualified to provide equity release advice, but can still advise on a RIO deal, this may leave the client at a disadvantage.

She added: “Brokers who do not advise on equity release need to partner up with a firm who can, so they are offering the full holistic advice.”

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