Changes by the Financial Conduct Authority in 2018 has had an impact on the range of products available for clients aged over 55 years. Changes in regulation have resulted in more lenders offering more products for later life lending.
Retirement Interest Only mortgages have become more widely available as a result of the FCA’s changes, with many more lenders becoming encouraged to enter the market. Retirement interest only (RIO) mortgages usually come with a lower rate and the possibility of borrowing a higher percentage of the value of a property but they also come with a monthly commitment.
Whilst a borrower may be able to afford the payments at the outset of the mortgage, care should be taken to consider the impact on income when the borrower(s) retire and if a joint mortgage when one of the borrowers dies.
Why do borrowers consider Retirement Mortgages?
As a mortgage advisory firm, we are getting an increasing level of enquiries from potential clients aged over 55 years but still liable for a reasonable mortgage debt on their home, in most cases these mortgages are on an interest-only basis.
We also get enquiries from potential clients looking to consolidate existing debt, usually credit card debt, as they approach retirement; as well as those looking to release equity from their property for a variety of other reasons such as providing deposits for their children to buy homes or improvements to their own homes.
Until last year, there were not many options available to these borrowers, they would have been looking at an equity release mortgage, home reversion scheme or maybe downsizing to release the required amount of cash. A small number of lenders also offered retirement interest-only mortgages.
What mortgage options were there for older borrowers before the FCA’s changes?
Equity release mortgages were much more common for older borrowers but tended to have higher interest rates than RIO mortgages. Added to that, equity release mortgages allowed borrowers to “roll up” the interest instead of making regular monthly interest payments with the resultant erosion of capital.
Whilst there is undoubtedly a need for this type of mortgage, many potential borrowers were uncomfortable with the high rates and loss of capital and potential inheritance for their beneficiaries.
Home reversion schemes, involving the sale of a percentage of the property to a financial institution in return for a cash sum (or lifetime income) and the right to live in the property for life have fallen out of favour for most borrowers with recent improvements to equity release mortgages over the last 10 years or so, had similar drawbacks in the eyes of the borrower.
What’s changed for Retirement Interest Only Mortgages?
Retirement interest-only mortgages have existed for many years but had tended to be offered by only a few lenders notably Halifax and Nationwide. All lenders withdrew from this market during the banking crisis at the end of the last decade. Retirement interest-only mortgages offer an interest-only mortgage arrangement for the life of the borrower or the last survivor in the case of joint borrowers.
Until March 2018, the Financial Conduct Authority (FCA) required that anyone advising in these Later Life Mortgages needed more qualifications than advisors operating only in the conventional mortgage market place for younger borrowers.
As such, lenders tended not to get involved in the market for retirement interest-only mortgages with only a few players pre March 2018. Around this time there were approximately 1.9 billion mortgages arranged on an interest-only basis. The regulator was concerned that there should be a more competitive and easily accessed solution to those borrowers approaching the end of their working life without repaying their mortgage debt.
After a consultation period in 2017, in March 2018 the FCA changed its rules and allowed all mortgage advisors to be able to advise on retirement interest-only mortgages. The higher qualification is still required to advise on equity release mortgages and home reversions schemes.
At the same time, this simplification of retirement interest-only mortgages encouraged more lenders to enter the market place. Most of the lenders are relatively small building societies with the notable exception of Leeds Building Society. Nationwide have also recently confirmed they will re-enter this market place. More choice for the consumer more often than not will result in more competitive rates being available.
Should older borrowers be considering Retirement Interest Only Mortgages in 2019?
Despite this relaxation of the level of qualification required to advise on retirement interest-only mortgages, in my opinion, any potential borrower would be better off being guided by an advisor capable of dealing with all types of later life mortgages.
Retirement interest-only mortgages usually come with a lower rate and the possibility of borrowing a higher percentage of the value of a property, but they also come with a monthly commitment. Whilst a borrower may be able to afford the payments at the outset of the mortgage, care should be taken to consider the impact on income when the borrower(s) retire and if a joint mortgage when one of the borrowers dies.
Equity release mortgages come with a probable higher rate and can offer the ability to make monthly interest payments. However, there is no commitment to making these payments which could make an important difference to the borrowers later on in their lives.
Home reversion schemes have reduced in popularity in recent years but still have a place for some potential borrowers, especially when they are looking at the higher loan to value borrowings without the income to comfortably service a retirement interest-only mortgage.
In summary, the marketplace for older home loan borrowers has become more competitive since 2018 as a result of the regulator simplifying the rules for retirement interest-only mortgages for both lenders and advisors.
Potential borrowers should take care to understand all the options available to them before committing to a mortgage that will probably be in place until the end of their lives or until they go into permanent care. The important advice remains that your home may be repossessed if you don’t keep up your mortgage repayments.
Mark Stanton holds more than 25 years’ experience as a mortgage broker, with a range of qualifications from the Chartered Insurance Institute. In 2000 he founded VA Mortgages, an Independent and Whole of Market mortgage advice firm who help clients across the UK.