Retirement interest only mortgages may have only just made an appearance into the mortgage sphere after the FCA’s recent announcement that it is enabling a new breed of products to improve access to borrowing for some older homeowners. However, for such a relatively new innovation, the concept and delivery are already making significant waves in the industry.
Previously, similar products required a qualification and license to sell them, but the recent FCA ruling has opened the market to new ways of working. Lenders no longer need to restrict these products to advisers qualified to give equity release advice and as a result, lenders including Nationwide, Legal & General, Hodge Lifetime and Vernon Building Society have all launched products into this market.
'Designed to broaden the lending solutions available in retirement, these products are likely to see a rise in availability to coincide with an ageing population.
It is no secret that the retired – and retiring – population is one that is growing. The ONS recently reported that retirees account for 18% of the 65.6 million UK population. With this overall figure expected to swell to 74 million by 2039, the percentage of retirees will also expand. It is clear then that as an industry we need to ensure the needs of this dynamic group are being met.
The FCA’s decision to redefine RIOM as standard mortgages will undoubtably boost the market then, enabling borrowers to unlock equity, downsize or pay off maturing interest-only mortgages. It will also allow consumers to continue paying monthly interest payments until they die or go into long-term care.
Whilst all of this sounds very positive, there are some larger market issues that need addressing to ensure the product can really hit the ground running and truly help the likes of customers who are in need of these innovative solutions.
Due to the relative new launch of these products, they are very few and far between. Only a select number of lenders actually offer them. Likewise, the availability of these mortgages are currently prohibitive for the majority of ‘ordinary’ borrowers. Sales of these types of mortgages will be dependent on the affordability on pension income for many borrowers.
Whilst we cannot deny that RIOM is a very innovative proposition for brokers and clients alike, it will certainly require a settling in period before it becomes mainstream.
With every single client and mortgage application different, it is important to provide context behind the lending solutions available to them. Both equity release and RIOM products provide valuable solutions.
The onus is squarely on the shoulders of lenders and mortgage clubs to provide these solutions. It is important that the industry innovates and evolves to meet the changing market conditions – and RIOM is doing just that. The appetite is certainly there from borrowers and many brokers are keen to offer this solution to clients. It is just a case of ensuring innovative solutions are given the platform they need to cater for its intended customers.
This blog was originally published on Financial Reporter
The Tipton and Coseley Building Society, a lender based in the Midlands, has become the latest to announce a new range of retirement interest-only mortgage products.
In a quote given to Mortgage Introducer, Cammy Amaira, Director of Sales at the Tipton said: 'For many years now, older borrowers have seen their mortgage options dwindle so it’s encouraging to see the FCA acknowledge this.
'Some people are really struggling when they come to the end of their existing term and find their lender won't extend the term, instead demanding that they sell up to repay the capital.
'Later life borrowing is a growing market and we’re committed to supporting those who are approaching retirement or are already retired. In many cases, these types of borrowers have an established track record of maintaining payments and with retirement income guaranteed, could be perceived as lower risk lending.
The launch of our RIO mortgage range coupled with removing the upper age limit for standard lending is the first step in developing a lifecycle of mortgage products aimed at building a long-term relationship with our members.'
The building society will lend up to 60% LTV which goes beyond the 25-40% currently on the market. This could enable borrowers with larger interest-only balances outstanding to remortgage. However it potentially also increases risks as this eats into the equity 'buffer' for the loan, should the borrowers get into repayment difficulty. According to Mortgage Introducer there are initial 3 and 5-year fixed rate options available with rates of 3.38% and 3.58%, as well as 3 and 5-year discounted variable options at 3.09% and 3.29%. The products allow 10% overpayments without charge, with mortgages up to £1m.
Similar to other building societies the Tipton has increasingly been focusing on the older customer segment of late. This product launch will be good news for customers in the Midlands - currently the only other RIO mortgages on the market from building societies are concentrated in Scotland, the South West and Lancashire. The fact the building society has also chosen to remove the age limit on its Standard Residential Lending range will enable older borrowers to also take a repayment mortgage into later life.
Retirement interest-only (RIO) mortgages are a product that should play into the natural strengths of building societies: a high degree of careful manual underwriting and relentless focus on customer need.The BSA is pleased that the FCA acted quickly to bring RIO mortgages into the rulebook after recognising during their ageing population work that these products could provide a good solution for some customers.
Showing the interest within the sector, twenty-seven building societies recently attended a roundtable with the FCA architects of the rule changes. During the event, it became clear that societies are keen to think through what extra consumer protections these products might need. While it will be up to each lender to think through the risks, here are a few thoughts.
Looking at the MCOB amendments the standout change is the additional guidance under 11.6.15, which states that:
'When assessing the affordability of a retirement interest-only mortgage with joint borrowers, 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' We welcome the additional clarity this provides and, certainly, it is good practice to check how much pension income would transfer across to a surviving borrower if the higher-earning partner were to pass away.
However, we know from speaking to experienced advisers in the retirement lending space that, in real life, many joint borrowers say they would not want to live in the same home if their partner died. It may be too large for their needs, or feel too empty.
Essentially, as long as the lender is satisfied that the property would provide sufficient equity to realistically downsize after first death, could they offer a product on this basis? The rules appear to leave this open. Of course there is always the risk that a borrower will say today that they intend to downsize but change their mind in future. It will be up to lenders whether they are comfortable with this risk.
Another interesting point on affordability concerns sources of pension income, where the rules are un-prescriptive. The consultation feedback was clear that '[RIO mortgages] will not be appropriate for older customers who cannot demonstrate their ongoing ability to afford to make interest payments.' Yet lenders may ask – how does this work in a world of pension freedoms?
Under pension freedoms, ongoing affordability relies on the borrower's choice. They essentially take on responsibility for generating an income out of their pension pot, with the longevity and investment risk. Lenders can only make a decision on the information in front of them at the time and assume the borrower will act reasonably. However, for a bit of peace of mind best practice might involve signposting customers to a Government service such as Pension Wise to make sure they really understand their options under pension freedoms.
Following on from these thoughts about pension freedoms comes the question – what else can lenders do today to future-proof? One of the less tangible areas is mental capacity.
Building societies have worked hard on their policies and practices for vulnerable customers over the past few years. Working with charities to make branches 'dementia-friendly' or auditing their call centres and record-keeping processes have been central to this.
Vulnerability policy becomes business-critical when lending indeterminately. It is inevitable that some of the people firms lend to today, will develop some form of dementia in future. The sad fact is that a person's risk of developing dementia rises to one in six over the age of 80.
One way customers can address this risk is through a Lasting Power of Attorney (LPA). To link back to the previous point: in a time where more customers are taking on the risk of generating income from their pension pot, a loss of mental capacity could leave them in serious financial difficulty.
For this very reason, a couple of societies already selling RIO mortgages offer a discounted rate for customers who register an LPA. This common sense promotion incentivises customers to plan for the future and prepare for the worst.
The final thing to consider is one building societies cannot do much about: that is the path of future interest rates.
In some ways, a RIO mortgage is similar to a lifetime mortgage. Pricing, however, is very different. With a lifetime mortgage, the rate is fixed for the whole life of the loan. For societies on a traditional or limited prudential approach, there is no way the PRA would allow this. Arguably, even the largest high-street lenders would struggle.
The FCA has made RIO mortgages part of the standard MCOB framework. Stress-testing a RIO mortgage against rate rises is therefore just as important. Arguably it is even more important, as the borrower is likely to be on a largely fixed income from their pension or other investments, and until a remortgage market develops their options may be limited when they come to the end of their initial deal.
While lifetime fixed rates are not in the building society arsenal, could a lifetime-discounted rate protect borrowers against potential interest rate shocks in future?
Of course, it is the responsibility of the borrower to keep up interest payments and repossession is an option if they fail to do this. Another option would be to transition into a lifetime mortgage. However, caution is needed against assuming at the outset that this will always be an option. Lifetime mortgages are very sensitive to loan-to-value bands and just a few years of falling house prices during the life of the RIO mortgage could change the arithmetic substantially.
This blog was originally published as an article on Charlie Blagbrough's Linkedin
Two months after the FCA announced a relaxation of what it now recognizes were its previously unduly zealous rules on interest only mortgages for older borrowers, two lenders (both small building societies who prior to the new rules already lent to older borrowers) now offer the new style Retirement Interest Only Mortgages (RIOM). A third lender has announced it will launch on 11 June and Nationwide has confirmed plans to enter the market, but with no indication of when.
Four key regulatory differences of this new RIOM category for older borrowers (although the FCA has left the minimum qualification age to lenders’ discretion) from the previous rules for such interest only mortgages are:
The two lenders already offering RIOMs are Vernon Building Society and Bath Building Society. Both sensibly offer a lower interest rate to borrowers who have a Lasting Power of Attorney and Bath has geographical restrictions on its RIOM lending but does lend in large parts of the South of England. Unfortunately, the restrictions on fixed rate lending imposed on small building societies by their regulator mean that their ability to offer fixed rate mortgages is much more limited than for the larger lenders.
This is reflected in the fact that the only RIOM rates offered by Bath and Vernon are discounts off their standard variable rate (SVR). Vernon’s initial rate is 3.70% up to 50% Loan to value (LTV), a 5-year discount, and Bath’s rate is 4.29% up to 25% LTV, a 1% discount for term. On the plus side, neither mortgage has any early repayment charge and the Vernon offer also has no arrangement fee. However, the lack of a fixed rate product is a major drawback.
The latest figures published by the Bank of England and the FCA show that 90.61% of new lending in Q4 2017 was on a fixed rate, the highest ever since records started. RIOM borrowers are, if anything, even more likely than the average person to want a fixed rate and so this mismatch between the type of interest rate borrowers want and what small building societies can offer is a major problem and an issue on which regulators need to reflect.
The lender launching RIOM products on 11th June is Hodge Lifetime, which- as its name indicates- already offers Lifetime Mortgages. Although its Lifetime products have a fixed rate for life, its initial RIOM offer will only be a 2-year fix at 3.59%, a 5-year fix at 3.99% and a 2-year variable with an initial rate of 3.44%. However, it has said it will consider adding a 10-year fix to the range. Its mortgages will all be available up to 60% LTV and the minimum age to qualify is 55.
Now we have pricing details available from 3 lenders it seems clear that the early adopters are taking a view that until competition increases, RIOM is a sector where they can charge a premium rate disproportionate to the potential extra cost of servicing the mortgage and any extra risk. This is not necessarily unreasonable in these early days, but we need more competition to drive rates down to levels which will make these mortgages a first choice compared with other options, as opposed to a mortgage someone takes because they have no other options.
Plenty of lenders are offering mainstream 5-year fixes under 2%, in some cases up to 75% LTV, and so the RIOM rates being offered only look attractive to those who need an LTV higher than is available from a Lifetime mortgage, where fixed rates for term start below 4%. Borrowers can choose to pay up to 10% p.a. without incurring Early Repayment Charges (ERC) on most Lifetime Mortgages and some lenders allow borrowers to make whole or partial interest payments monthly if they wish.
Although lifetime mortgages have lower maximum LTVs than most RIOMs, they have the advantage of not needing to prove affordability because the default position on that interest is rolled up. Because many older homeowners who want an interest only mortgage only need a relatively low LTV they will often qualify for a lifetime mortgage. Therefore, if lenders offering RIOMs expect a good spread of LTVs, they need to be competitive with the best Lifetime Mortgage rates. Otherwise they are likely to miss out on a good percentage of cases only needing a low LTV.
Although not designed as such, an alternative way of looking at a Lifetime Mortgage is that it is mortgage on which interest can be paid but if, at any time and for any reason, the borrower wants to either pay only part of the interest or cease payments altogether, they are free to do so. Such a proposition will offer considerable peace of mind to many older borrowers who can afford to pay the interest now but recognize uncertainties may lie ahead.
This is why providers offering RIOMs need to reflect in their product range and pricing that they are competing with both mainstream and Lifetime products. If providers can’t offer a lifetime fixed rate in their RIOM product range, they should consider including fixed rates for at least 10 years. Although not popular with younger borrowers, longer term fixed rates are more likely to appeal to the older cohort. Lenders will also need to make it clear whether or not ERCs will be waived on death or going into care and this will be an important point for advisers to consider.
Lenders need to factor some extra costs into the pricing of RIOMs, including the fact that a higher proportion of borrowers in later years are likely to need more human contact, but because of the low maximum LTVs on this type of mortgage the risk of loss is likely to be extremely low. Therefore, higher rates than are available on mainstream mortgages are understandable but the current differential needs to narrow for these mortgages to look attractive. I expect that to happen as competition increases.
With margins on mainstream business squeezed, the massively better margins on RIOM should tempt some of the bigger lenders into the market sooner rather than later, and hence should result in competition increasing quicker than might otherwise have happened.
From a funding perspective one major advantage RIOMs have compared to Lifetime Mortgages is that there is a guaranteed income stream from day 1, which will make it attractive to funders who would not entertain the Lifetime market. Furthermore, compared to Lifetime Mortgages lenders will not have to factor in the cost of the no negative equity guarantee into their pricing of RIOMs.
When the RIOM market has matured, which may take a couple of years, we should see a range of fixed rates from 2 years to lifetime, with long term RIOM rates perhaps 0.5% lower than Lifetime mortgage rates and a much smaller spread than currently above mainstream rates for shorter fixes.
Older people wanting a mortgage will then have even better options than are currently available. As the number of older borrowers increases they will not only at last have similar mortgage choices to their children and grandchildren but in addition have options their under 55 family members won’t have- the RIOM and the Lifetime Mortgage.
This blog was originally published on the mortgage broker John Charcol's website
The Family Building Society, a small lender headquartered in Epsom, has become the first to announce plans to release a retirement interest-only (RIO) mortgage product since the Financial Conduct Authority (FCA) introduced regulation in March 2018.
In a quote given to This is Money, Keith Barber of Family Building Society said: 'There is patently a need for retirement interest-only mortgages to come back into the market - especially for those who need to remortgage an existing loan.
'Some people are really struggling when they come to the end of their existing term and find their lender won't extend the term, instead demanding that they sell up to repay the capital.
'While the finer details of our retirement interest-only mortgages are still being considered, we are confident that we'll be able to offer these borrowers a flexible option that works for them and helps them in their retirements.' Elsewhere in the article the lender says they are aiming for a launch date in September
Family Building Society is a brand of National Counties and is somewhat of a specialist in lending to older borrowers. The building society has no age limit in lending policy and also has an innovative product known as the Retirement Lifestyle Booster which enables borrowers to release some pent-up equity from their homes.
The Financial Conduct Authority consulted the public late last year on whether to bring back rules for retirement interest-only (RIO) mortgages. These are interest-only mortgages without an end date, essentially meaning the loan will be paid back out of the equity in the homes
While some people will be wary of squandering their children's inheritance if they cannot keep up payments on these loans, others will welcome these products as a good addition to the financial arsenal.
There are thousands of people in the UK coming to the end of an interest-only mortgage term with no other means to repay. These products will bring a measure of hope to such people that they can stay in their home until death.
Reported in Financial Times Adviser, Jackie Bennett of UK Finance said: The reclassification of retirement interest-only mortgages will offer homeowners in later life an alternative option, alongside equity release, for those who wish to stay in their homes.
"It’s useful that the FCA has clarified what information will need to be disclosed to customers so they are fully informed and provided further details on how lenders will need to carry out an affordability assessment."
In the same article, David Hollingworth, a director at London & Country, said: "This recognises the fact that older borrowers can, in some cases, want or need access to a standard mortgage that will run into later life.
"This could offer a viable alternative for some borrowers alongside the alternatives such as equity release. We will have to see how lenders fare in funding this type of open-ended product but it at least signals an understanding that older borrowers can justifiably take on a mortgage in later life, which should help lenders shape their policy."
There will be a question over whether traditional high-street lenders enter this market or whether it is more likely that equity release lenders, who can offer life-time fixed rates, will become the dominant force. However, the FCA is clearly keen to make these products attractive to a wide range of financial firms and foster competition.