Tom Gurrie offers some key insights into retirement interest-only mortgages.
The rules have changed
Last month the FCA redefined retirement interest-only mortgages – RIOs – as standard mortgages, not lifetime, to improve access to borrowing for older consumers, including interest-only borrowers facing shortfalls. Expect a boost in the number of these deals once lenders work through the practical and technical challenges of the rule change. And ensure you’re ready to help your older clients explore all their later-life lending options.
An alternative to equity release?
The ‘younger old’ may find that the typical roll-up of interest on lifetime mortgages eats away at their equity. This can put off some people, particularly if they are anxious that as much as possible of their estate be passed on to children/grandchildren. No roll-up of interest with RIOs ensures the original debt never increases. Of course, they still need to afford monthly interest repayments.
Not an ‘either/or’ situation
RIOs sit alongside interest-only and equity release products. They become another tool for the adviser to work with. Equity release still offers a solution for many later-life borrowers, but a lot of income-earning older borrowers want access to borrowing on normal terms, not to have their age go against them. Later on, it may feel more appropriate to go down the equity release route and, subject to the usual LTV requirements, that option will still be there.
An answer for interest-only borrowers
RIOs can help interest-only borrowers who need extra time to repay their mortgage balance, or who want to use the sale of their home – on either death or a move into long-term care – to repay their balance. With almost two million interest-only borrowers and tens of thousands estimated to have shortfalls, this is a potentially huge market for RIOs.
Lasting Power of Attorney link
RIOs require payment of monthly interest for the full life of the borrower, so complications can arise through loss of mental capacity, such as with dementia. Clients should be advised to register a Lasting Power of Attorney, which protects them and their family if they can no longer manage their finances. It also means the family are involved from the start, so no surprises later when the mortgage has to be repaid. Vernon charges a lower rate when there’s an LPA in place, to reflect the reduced risk.
Tom Gurrie is intermediary sales manager at Vernon Building Society