Retirement Interest Only Mortgages

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A number of lenders have been quick to launch (or relaunch) Retirement Interest Only [RIO] mortgages following the recently amended definition of lifetime mortgages by the Financial Conduct Authority [FCA]. As the FCA no longer defines RIOs as lifetime mortgages lenders have been given the ‘go ahead’ to develop/re-develop such schemes. As implied, such schemes are not new to most established lenders, a number operated similar products until an earlier FCA definition which included RIOs as lifetime loans led to most lenders withdrawing such products from their available portfolio. Commentators have suggested that RIO mortgages will play to the strengths of those lenders who focus on manual underwriting carried out by well trained and skilled underwriters, such as building societies. Lending into retirement and equity release mortgages, which are different propositions to RIOs, have resulted in significant consumer detriment in previous decades so it is not surprising that the ‘early adopter’ providers are ‘dipping a cautious toe in the water’.

Lenders are rightly concerned about three initial risks; affordability risk, interest rate risk and capacity risk

Lenders are rightly concerned about three initial risks; affordability risk, interest rate risk and capacity risk. At a high level the concerns are:

  • Affordability risk is an issue as regulators require the loan to be ‘affordable’ by a surviving borrower when a partner dies; payments on RIOs must be made as these products do not allow the ‘roll up’ in interest.
  • Interest Rate Risk may occur when the borrower receives a fixed income, but it is highly unlikely that these loans will be available with a lifetime fixed rate of interest. Lenders, therefore, need to ‘stress test’ affordability against future increases in interest rates.
  • Capacity risk is a possible concern considering the potential target market for RIOs., Lifetime mortgages and equity release mortgages have attracted more than their fair share of ‘issues’ in the past. It is not surprising, such products are complicated and the borrowers often vulnerable. Several lenders have mitigated this risk by requiring a Lasting Power of Attorney [LPA] to be written.

From where I sit, there is a common concern between lenders on the above issues. However, policies have become polarised in two areas:

  1. Whether to accept direct business or only to accept introduced business and
  2. Whether an introducer of such business should hold an additional appropriate qualification (such as The London Institute of Banking & Finance Certificate in Regulated Release).

The first point is not surprising as if there is any product that potentially needs a face to face interview this it. As specialist lenders often operate from a central base and building societies often only employ staff in a regional location a ‘face to face’ is more difficult for such lenders. Intermediaries should rejoice that a number of lenders will only accept intermediary introduced RIOs.  The ‘elephant in the room’, however, is the issue of additional specialist qualifications. Understandably, in my view, a number of lenders will only accept business from intermediaries who are appropriately qualified. I remember the kicking and screaming of intermediaries when they were forced to pass CeMAP style exams. It is not surprising, therefore, that some will revolt against an additional qualification for this product too. This is an attitude I just don’t understand, good consumer outcomes are in all parties’ interest especially the adviser so why would they resist such a move – my message would be ‘just do it’. Apart from being positive from a personal marketing perspective, intermediaries, and their customers, will benefit from a wider choice of available lenders.

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Partner - Baxters Business Consultants - a business consultancy undertaking marketing, training, freelance journalism and expert witness services to the residential mortgage lending, building society and financial service industry (April 1993 to date) - www.baxtersbc.co.uk.

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