RIO Grande: Why Retirement Interest-Only mortgages are coming to the fore

For older, high-net-worth customers, RIOs are emerging as a powerful way to unlock property value

RIO Grande: Why Retirement Interest-Only mortgages are coming to the fore

Retirement interest-only mortgages (RIOs) are a relatively new product in the mortgage market, but they are gaining favour as a lending option for wealthier homeowners looking to access funds in later life, said one market insider.

In 2018 the Financial Conduct Authority removed a regulatory barrier, allowing for the retirement interest-only mortgages sector to develop, helped in part by excluding RIOs from the definition of a lifetime mortgage.

Clare Ansell (pictured), a banking director at Hampden & Co, said figures show that, four years later, retirement mortgage lending is still dwarfed by equity release, but emerging as a new option for certain clients.

Equity release vs. retirement interest-only mortgages

Ansell said one challenge to client uptake has been the lack of differentiation and understanding of the key differences between RIO mortgages and equity release mortgages.

“Given the success and marketing activity around equity release, the benefits and nuances of retirement mortgages may have been lost,” she said.

Notwithstanding, Ansell expects the former to take greater market share in 2023, particularly as more mortgage brokers and intermediaries come to better understand and discuss them with clients in the later-life lending market.

“We know that traditional equity release is attractive for those who need to raise money for their retirement, perhaps due to a pension shortfall. However, clearly, it can come with risks and caveats,” Ansell said.

As the interest rolls up, the customer ends up paying interest on interest, which can prove significant as it eats into the equity of the property.

Indeed, Ansell said, if someone taking out equity release in their 60s lives into their 90s, there may be nothing left to hand on to the next generation.

What are the benefits of retirement interest only mortgages?

Ansell said customers with an RIO only have to pay interest on the borrowing; the loan capital is repaid when they move into long-term care and sell the property, or upon their passing.

“With our focus on high-net-worth clients, we have seen clients truly value, indeed need, a flexible and bespoke approach to lending, and that, within this context, retirement loans can offer a solution to meet their needs, often better than other types of lending,” she said.

Ansell added that older high-net-worth clients are often living a full life and are less inclined to downsize from their family home.

RIO advantages for affluent clients

As RIOs allow customers to retain the certainty of protecting their equity and provide quick access to funds, Ansell said she has seen many older clients use this product in recent years to manage their inheritance tax liability. 

“Clients have seen their children benefit from the passing of their wealth during their lifetime, particularly at a time when the younger generation can struggle to get on the property ladder,” she said.

Ansell added that other clients simply want to release a lump sum without disturbing other assets and investments.

In both cases, she believes the solution may be to raise funds against the value of their principal property through a retirement mortgage.

Ansell said she has often seen clients approaching Hampden & Co having been turned down by mainstream lenders due to their age or because they do not meet an algorithm-driven approach to lending decision-making. 

Given current market conditions, Ansell believes the popularity of RIOs is only set to rise further over the course of 2023.

“For brokers and intermediaries active in the higher net-worth and affluent markets looking for a flexible option for their older or in-retirement clients, we believe that retirement mortgages deserve a very strong look,” Ansell concluded.

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