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‘RIOs can be better than equity release but affordability is a barrier’ – Star Letter 10/01/2020

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  • 10/01/2020
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‘RIOs can be better than equity release but affordability is a barrier’ – Star Letter 10/01/2020
Each week, Mortgage Solutions and its sister title Specialist Lending Solutions runs a Star Letter feature, in which we collate the top comments posted under our articles.

 

The first article to gain a reaction: Homeowners can pay £10,000 more for equity release than RIO loans 

Paul Fielding said: “Like many advisers, I’m sure that we all have enquiries from clients which simply dont stack up on income from an affordability perspective.  

I have tried to place a number of cases on RIO where the pension income simply isn’t sufficient to meet the lender’s way of calculating affordability. The fact that different lenders have different calculators, doesn’t help, of course – which is down to the regulator.” 

He added: “Further, where the husband tends to have the much greater pension in his name, lenders are concerned about the wife, with a much lower pension very often, being able to continue paying the loan upon the husband’s death when the household income is decreased in this way. Not all husbands’ pensions pass to the wife on death, in sufficient amounts to make it affordable.  

In certain cases, where life cover is still affordable, the wife may be fortunate enough that her husband can leave a lump sum to her, to clear some or all of the loan. 

“There needs to be greater emphasis on the fact that people may have no choice other than equity release schemes and that also goes for couples who cannot afford to make any interests paymentsunless the kids contribute which only certain lenders permit,” he added.

 

Other factors to consider

Andy Wilson agreed that retirement interest-only (RIO) mortgages could be less costly than equity release mortgages but said that was not all it came down to. 

He said: “If you look at a RIO versus an equity release mortgage in pure terms, they are often better – especially if applicants want higher loan to value (LTV) loans than an equity release plan can provide – but only if the applicants will always be able to afford it and if they never need any more money as drawdown is available on an equity release plan for further borrowing in the future.

“It’s also better if borrowers accept the interest rate may change in the future as equity release mortgages are at fixed interest rates for life.” 

He added: “Equity release lifetime mortgages are not always a perfect solution, but for various reasons RIO mortgages are often not ideal either, irrespective of relative costs. 

 

Referral commissions causing conflict of interest 

Another article which garnered a response was: Conditional property selling made a comeback in 2019, but is it acceptable today? Analysis 

Arron Bardoe replied to this, saying: “The Property Ombudsman has all but outlawed the practice, but it continues and to significant consumer detriment. 

“A few estate agent brokers have said that they would be reluctant to discourage a borrower buying a property even if it was the right this to do as this may impair their relationship with the agent.” 

He added: “The safest solution is to have an outright ban on referral commissions being paid to agencies as they are also acting for the vendor causing a conflict of interest. Such referrals should only be allowed for the agent to vendors. 

“Of late, I have seen agents getting referral fees from solicitors of £1,400. How is this justified? This is a simple cost added to the legal bill and paid by the customer for passing a name and phone number. No wonder the sales are conditional.” 

“Of course, I acknowledge there are some buyers who do not have access to a broker, so referrals without a commission would ensure agents recommend brokers who offer a whole of market proposition and good service, as there would be no other influencing factors,” he added. 

 

Referral fees should be disclosed upfront

Bardoe said: “In lieu of this, I will make three very controversial suggestions, even if the broker is in the same company: firstly, any brokerage receiving referrals should lose the ‘independent’ title. Independence does not relate to the breadth of one’s lender panel, but that a broker will put a client’s best interest first. This is clearly never going to be true for a broker receiving most of their income from an agent. 

“Secondly, referral fees must be disclosed upfront by the agent and again confirmed by the broker at the point of sale – the client signing to acknowledge the cost. 

“Thirdly, the individual broker be required to disclose their spread of lenders. Time and time again, I see in-house brokers trading as independent and whole of market using two to three lenders, often due to the online decision in principle (DIP) system and speed of offer; who really needs an offer in one week when the legal process takes eight to 12 weeks. 

“And lastly, the solicitor acting for the buyer to obtain a statement saying there were no conditional sales in accordance with the Property Ombudsman rules. Buyers who are coerced at the point of sale may be more confident once the offer is accepted.” 

“Our regulator needs to act to ensure the protection of consumers and let us hope the other professional bodies follow suit,” he concluded. 

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