Retirement Interest Only Mortgages (commonly referred to as RIO Mortgages) have increased in popularity over the past year with more lenders entering the market. This change was partly due to the Financial Conduct Authority cutting red tape in March 2018, which resulted in these type of mortgages being reclassified so they were subject to standard mortgage sale requirements, rather than equity release conduct requirements. This change in classification made RIO Mortgages more appealing to mortgage lenders as they no longer required the system changes and staff training required to comply with the equity release standards.
RIO Mortgages may suit the needs of many older borrowers, especially those with an interest only mortgage that’s coming to the end of its term without a repayment vehicle in place. There are currently around 1.67 million full interest-only and part capital repayment mortgage accounts outstanding in the UK, according to the FCA. They represent 17.6% of all outstanding mortgage accounts and, over the next few years, increasing numbers will need to be repaid in full. These products could provide a potential lifeline to borrowers in this situation, as long as they meet the lender’s affordability criteria, ensuring they can remain in their home for the rest of their retirement. RIO Mortgages are not available to all borrowers as affordability is an issue, unlike Equity Release products, and customers without a large enough guaranteed retirement income won’t be able to access these mortgages.
These products allow older borrowers (who are typically 55 plus) take an interest only mortgage that doesn’t have a set end date and pay monthly mortgage interest until a specified ‘life event’, which is usually when they die, or go into long-term care. At this point the loan is repaid through the sale of their property. Unlike a Lifetime Mortgage, there isn’t the concern of rolled up interest eating into the remaining equity because the borrower is paying the interest due each month, as they would with a standard interest only mortgage. The borrower also retains ownership of their property, unlike some Equity Release products.
RIO Mortgages could appeal to these types of client:
Existing interest only mortgage customers who have come to the end of their term and are unable to repay the capital balance, but they can afford to maintain their monthly repayments throughout retirement.
Older clients looking to fund lifestyle choices or retirement planning options by releasing equity in their homes. As part of this, they have a strong desire to protect equity in their home and leave an inheritance for their family. If the client has sufficient equity in their home, a RIO Mortgage can help with anything from home improvements to financial planning.
Older clients looking to free up equity pre-retirement, to give children or grandchildren a helping hand on the property ladder or to fund a holiday home.
Key features of RIO Mortgages:
Maximum 40-70% Loan to Value depending on lender (most lenders offer 50/55% max)
Minimum Age 55+ (some lenders 60-65+)
No maximum term - Mortgage to be repaid from the sale of the property when client goes into care or dies
Available Products - Fixed Rates 2/3/5/10 year or Discounted Variable Rates
Available for remortgage or purchase
Affordability assessment is a requirement, must be affordable for the remainder of the client’s life
Key areas to be aware of:
RIO Mortgages can be offered by advisors with the CeMAP or Cert CII (MP) qualifications as the Equity Release qualification isn’t required. This is due to RIO mortgages having full affordability assessed on the client, as per standard mortgages.
When assessing affordability for joint borrowers, the MCOB amendments for RIO Mortgages stress “the firm should consider the ability of a single borrower to continue making the required payments if the other dies, taking into account relevant evidence such as pensions payable to the surviving spouse or civil partner.”
Unlike standard Interest Only Mortgages, a credible repayment strategy isn’t required by the client because the sale of the property as a result of a specified ‘life event’ will be the means of repayment. Therefore, the adviser is not required to assess the probability of the repayment strategy working.
Depending on the client’s age and situation, there is an increased probability for vulnerable clients and this assessment will come into the advice process. The client will be responsible for the repayments for the remainder of their life, so they may wish to consider a Lasting Power of Attorney (LPA), which allows them to choose someone to help them make decisions or to make decisions on their behalf in the event of them being unable to do so.
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Article written by Paul Hewitt
Tenet Lime
Research & Technical Specialist
Spring 2019 (56)