Between 2018 and 2020, just 2,911 had been sold to borrowers, falling short of the regulator’s prediction that 21,000 would be sold by this year.
Yet, tighter affordability indicates that expecting the product to serve tens of thousands of people in an already small segment of the mortgage market is unrealistic and instead, its success should be based on how well it suits the few eligible customers.
So this week, Mortgage Solutions is asking: Is it reasonable to assume RIOs will only ever serve a small segment of borrowers?
In their current form, it is perfectly reasonable to assume that RIO mortgages will remain a niche product.
Since their inception, the number of applications has been very low, there are several reasons for this but for me, the main issue is that very few borrowers can qualify for the product due to the requirement of proving income for life, even if a spouse dies first.
Few people have that much disposable income and those that do tend to pay their mortgage off using a standard residential product.
The later life lending market has also changed in the last few years, with many equity release products now offering the ability to pay interest but without the need to prove income and with the flexibility of stopping payments altogether if circumstances change further down the line.
Lastly, adviser knowledge and confidence in a product that they might have never advised on will also be an issue.
Clearly, all advisers must ensure that they keep their knowledge up to date and that they are able to advice on products that best fit their client’s circumstances.
For some, the RIO product falls between residential and later life lending and advisers often specialise in one or the other.
There will of course always be a place for RIO mortgages and innovative lenders such as LiveMore will further expand their proposition. In reality, however, the product will be rarely used as many will choose the equity release route instead.
Retirement interest-only is by definition targeted at a certain sector of the market and that is important to remember when trying to quantify the success of RIO.
Given it’s a product only available to older borrowers and working on the assumption that a good number of us will remain focused on repaying the mortgage ahead of retirement, did we really expect that RIO would be taking significant share overnight?
The regulator clearly saw that there was a need to open up mortgage availability in a market that had become increasingly restrictive for older borrowers post mortgage market review.
That will no doubt have in part been to offer a practical solution to interest–only borrowers reaching the end of their current deal with little chance of repaying the loan.
Being able to offer a mortgage that doesn’t simply postpone repayment by a few more years should help a good deal of borrowers, many of whom will have a solid income and plenty of equity in their property.
RIO isn’t limited to that though and has plenty of potential to grow as the number of available products and lenders increases and public awareness improves.
Newer lenders like LiveMore joining those that have already embraced RIO will only help criteria adapt and improve the understanding of borrowers and advisers alike.
It will never be the right option for everybody but the fact that it opens up an alternative solution for some that could otherwise be excluded from the market should be a good enough reason to view RIO positively and as an area with real potential to grow.
The regulator delivered RIO guidance largely on the back of many current interest-only mortgages due to mature over the next 10-12 years where the holders have no means of paying them off other than by downsizing.
RIOs seek to provide a possible solution by allowing a new interest-only loan well into retirement.
One of my main concerns about RIOs is that mortgage brokers can arrange them without having any requirement for them to have experience or knowledge of the later life issues and implications.
Without experience of lending to older people and retirees, it is easy to miss these very important considerations with RIOs.
However, it seems that for some advisers the only real consideration is: can clients afford it now and can we meet the lender’s requirements for affordability, whatever they may be?
Advisers can, of course, shop around to find at least one lender who will make the loan – but to simply make the case fit at all costs surely cannot be right.
One of the alternatives to RIOs is an equity release lifetime mortgage.
I suspect many mortgage advisers looking at RIOs will not be considering equity release alternatives because they think they will lose the client and all of the income on a sale.
While perhaps understandable, this is not treating customers fairly. If instead they forge a relationship with an equity release adviser, they can still be well rewarded for the referral to the satisfaction of both sides.