The later life lending market has been the focus of much change in 2018 with the Financial Conduct Authority redefining retirement interest-only mortgages as standard mortgages in March. Lenders have been quick to respond with a range of new options, with some of the first to market being the Bath and Vernon Building Societies.
Other building societies – some of which are smaller and able to be nimbler with their product development than larger lenders – have expressed an interest in these products, and the Building Societies Association highlighted that 27 different societies attended a roundtable with the FCA to discuss RIOs. However, they are not alone, and equity release lenders are also likely to launch RIOs – with Legal & General suggesting they might enter the market in 2019 and Hodge already offering these products.
But who are these products aimed at and where do they fit within the market? FCA figures suggest there are around 1.67 million full interest-only and part capital repayment mortgages outstanding, with RIOs seen as a lifeline to help these borrowers. However, they are not the only option, with equity release and other later life mortgages, many referred to as Retirement Mortgages, also serving these customers’ needs.
Making a choice
All this innovation is good news for advisers because while they may previously have had to turn away clients who were “too old” or did not meet other lending criteria, these products provide more flexibility. Choosing which option is most suitable is of prime importance.
It is important to stress that it is not an either/or decision when it comes to these products as they can all form part of the “mortgage borrowing lifecycle”. Indeed, it’s not inconceivable that somebody may have a “mainstream” mortgage until their mid-50s, then take out a RIO or specialist mortgage aimed at older borrowers until they reach their 70s, before moving to a lifetime mortgage.
Affordability is one of the biggest factors in determining what solutions may be available for individuals, because potential RIO customers need to prove they have a guaranteed lifetime income to meet these interest payments. This can be even trickier if it is a joint-mortgage, as each borrower must prove they can make these repayments independently.
If clients meet these criteria, RIOs are likely to be suitable for those who need LTVs higher than those available through lifetime based on their age/health profile, shorter term borrowing and/or are concerned about compound interest and its impact on inheritance. Some equity release products offer inheritance protection and the option to repay the interest and/or capital on an ongoing basis so the latter criteria is less of a consideration than it may have been two years ago.
Ask an expert
RIOs and retirement mortgages are typically sold by “high street” brokers or directly through lenders whereby equity release products are advised by specialists. And therein lies one of the biggest challenges facing the market – how do we ensure that later life borrowing clients are aware of all their options?
This concern was highlighted by the FCA, which has said that customers enquiring about RIOs must be informed that “a lifetime mortgage may be available and more appropriate for the customer”. What does a broker or lender do if, as part of their consultation with the customer, they highlight this option and Mrs Smith says: “that sounds interesting, what is a lifetime mortgage and how can I compare the features and benefits of those other products?”
In an ideal world, the broker would have the necessary qualifications and access to appropriate sourcing tools to provide her with holistic advice on this topic but sadly, as an England Cricket fan, I can testify to the fact that the world is often far from ideal.
In reality, some will simply point customers to the numerous online resources and suggest they do their own reading while others will point their customers to a specialist – either within their own firm or via a referral relationship. Each firm will have its own approach but there are certainly suggestions that compliance departments are more comfortable with the latter rather than the former.
If 2018 was an exciting year for the later life lending market, 2019 promises to be even more exciting and, dare I say, challenging. With increasing numbers of older borrowers and product innovation continuing at pace, more will be asked from brokers by these customers than ever before. This presents opportunities – something that those firms who seize the later life nettle and properly define their offering will be ideally placed to capitalise on.
Will Hale is chief executive at Key