This month we ask…
Are guarantor RIO mortgages in which offspring support parents with repayments a good idea?
David Hollingworth, associate director of communications at London & Country
If you ask a broker whether there should be development of a product to potentially grow its range of use, it’s highly likely that the answer will be yes. The better the range of products, a greater reach and increased flexibility of both the product and its criteria is unlikely to meet with much resistance.
So, even though the retirement interest-only market is still in its infancy it wouldn’t be a surprise to see lenders and brokers thinking about how the product can evolve and be adapted in order to better serve the end user.
It may be jumping the gun when we are still yet to see many of the big mainstream lenders show their hand on RIO but it’s not too difficult a stretch to see where the involvement of children as guarantors could play a part.
One of the key issues for RIO is for affordability to be met by the borrower, as they potentially face a monthly mortgage cost for the rest of their life. Quite rightly that will raise questions, such as what happens if one borrower passes away leaving the other to contend with the mortgage on their own?
There is likely to be plenty of demand from older borrowers keen to use equity from their property for the benefit of their family. However, there will also be situations where the family is looking at ways to best help an ageing parent who may ultimately need assistance but wants to stay in their home.
Being able to support some RIO borrowing in this way could pave the way for essential alterations or repair to the property or for care over the longer term. Affordability could be supported by other family members offering a guarantee where there would otherwise be a shortfall. Equity release may offer an alternative but there will be times when all parties are attracted to the RIO option.
Nonetheless, success will still hinge on the right safeguards being in place to ensure that what could be a useful solution for many isn’t open to abuse.
John Phillips, operations director at Just Mortgages and Spicerhaart
There is obviously a need for retirement interest-only and equity release-type products. The older generation is property rich and cash poor and they need a way to access that cash, whether it is to supplement pensions or in many cases, make much-needed repairs to homes they have lived in for decades.
But I do not think guarantor RIO mortgages, where offspring support parents with repayments, are a good idea at all. Saddling the younger generation with their parents’ debt is just asking for trouble.
All that will happen is that we will store up a problem for the future. When those offspring go to buy their own property in the future, the RIO mortgage they are repaying will be taken into account in the affordability calculation, and we will simply stall the market from the other end.
There is obviously an issue with the housing market at the moment – but this is not the solution.
What we need to do is make it easier for older people to downsize, because this kills two birds with one stone.
Firstly, it frees up all those large family homes that are in short supply, and secondly, it gives older people the opportunity to free up cash without committing to further borrowing.
But there are two barriers; there are not enough two and three-bedroom bungalows available and stamp duty is extortionate.
Older people should not be forced to pay £3,000-4,000 on stamp duty to move into a home worth less than the one they are leaving. It is ridiculous, and it is no surprise that older people are not prepared to do it and are instead looking for alternative ways to release the capital tied up in their homes.
The whole market needs freeing up and the most obvious way is to end stamp duty altogether, and hopefully the government will listen; the very least that should happen is make anyone over the age of 65 who is downsizing exempt. These are the types of measures we need to be putting in place, not bringing in more ways for generations to burden each other with debt.