Family Building Society says standard IO loans often beat RIOs for flexibility and planning
This article was produced in partnership with Family Building Society
Stuart Heavens fields frequent calls from brokers asking about retirement interest-only (RIO) mortgages simply because their client is or soon will be retiring, and he has a message to share: standard interest only (IO) mortgages are available for older borrowers. And not only are they available, in many cases they’re preferable.
“From my perspective, for the vast majority of enquiries, once the broker explains what their client is looking for only a handful are truly after a RIO,” Heavens, business development manager at Family Building Society, explained. “RIO has retirement in the name, so they assume it’s the way to go, but that’s not the only factor to consider. A standard IO mortgage is a viable alternative no matter the client’s age.”
Leaning into later life lending
Family Building Society’s core IO proposition is a standard interest only mortgage, up to a maximum 80% LTV. Subject to income, an IO mortgage is available to anyone up to the age of 89 at application — lending to a late age makes the lender’s later life lending solutions a stand-out amongst competitors — and beyond the standard retirement age of 70-75, the lender looks for passive income such as from pensions, investments or properties.
While the standard IO mortgage has a term, whether it be 10, 15, or 20 years depending on the client’s needs and affordability assessments, the RIO has no specified end date: the term runs until a specified life event occurs, such as if the applicants pass away or move into permanent care. The main benefit of a RIO is that it takes away an element of worry over how someone will repay a mortgage, however the LTV ratio is also considerably lower, maxing out at 50%.
“When we talk to brokers, they often prefer a standard IO mortgage because rates tend to be a bit lower and affordability more generous because we use 100% of all guaranteed incomes and up to 90% value of a SIPP,” Arif Kara, fellow business development manager at Family Building Society, said. “RIOs’ requisite ‘death stress test’ that considers the worst possible income if one of the two applicants were to die is a stumbling block for a lot of people.”
For the standard IO mortgage, it’s the no minimum income requirement that’s the central highlight for Family Building Society’s lending criteria, and a significant differentiator from other products in the market. Most others who offer an IO option only accept people of a working age and tend to have substantial minimum incomes, once again a barrier for many.
“I’m passionate about the need for no minimum income as long as they have a tangible exit strategy,” Heavens said. “High minimum income requirements can make interest only unfairly unobtainable for many. We’re also able to provide a lot of additional flexibility for older borrowers with lower income but background wealth by monetizing assets such as pension pots or investment funds.”
Kara illustrated the difference with an example: a client finishes their mortgage at a high street lender and comes to Family Building Society for another 10–15-year IO mortgage. Because they continue to make interest payments, they maintain their equity in the property until they’re ready to downsize.
Factoring in inheritance planning
Take another example of clients who are parents and sitting on a £2million unencumbered property with £1million in a pension pot that they’re not drawing from. In these cases, there are potentially tax-efficient ways to leverage an IO mortgage. The client in this situation could use their pension to qualify for a mortgage, gift their children the money to buy their own property, and offset the residential mortgage from their tax bill.
The main perk is they’re able to do this without drawing funds from their pension and paying income tax on it, Kara said, adding that while they’re not tax experts and the proper professionals should be consulted, he can confirm this approach is “a big bread and butter area for us.”
“The fact that we're able to monetise pension pots without it costing the clients a single penny, reduce IHT liability, and at the same time offer a way to get their kids on the property ladder is a big winner. It’s taken off with a lot of our brokers.”
Heavens added that this same scenario can work with investments as well. Rather than withdrawing funds under management with a wealth professional and paying tax, for example, that level of wealth can service the IO mortgage with Family Building Society. This allows the borrower to gift to their children earlier while their investments are still in place, potentially growing in value.
“Of course, everyone should seek appropriate advice — but in the right hands, IO mortgages can be a great tool,” Heavens said.
Family Building Society — it’s all in the name
The two areas that elevate Family Building Society from a broker — and borrower — perspective are service and products. For the former, it’s about the human touch, noted Kara. Providing manual underwriting is one example. It means a BDM can walk a few paces within the office and discuss face-to-face a case with the underwriting team. BDMs also do a lot of Agreement In Principles themselves, sending them to brokers via email along with the application.
“This matters because the areas we deal with can be complex or out of the norm for some brokers,” Kara explained. “A helping hand from us on other side of the phone goes a long way. It’s an avenue where we differ. Reachable, knowledgeable BDMs are paramount to our business.”
In fact, every postcode in the UK has its own dedicated BDM — Family Building Society has nine in total — and that level of coverage is not available at peer lenders. That means BDMs have more time to focus on the brokers in their respective areas, making the service much more bespoke and tailored to each region.
On the product side, it really does come down to the innovative criteria at Family Building Society. Coming from a high street bank background as an IO mortgage advisor, Kara saw firsthand how potential borrowers would trip over steep minimum income or equity requirements. Heavens pointed again to the no minimum income requirements as an example of the flexibility Family Building Society provides, stating that “hand on heart I believe we have no competitors — we’re in a class of our own.”
So, while some brokers may be hesitant over whether an IO mortgage is right for their client, the Family Building Society team urges them not to shy away.
“If you want more information — and great service — go to our intermediary website, punch in your local postcode, and pick up the phone to your BDM,” Kara said. “We’re here to help determine what’s right for your clients.”
