Brokers unsurprised by pitiful low take up of RIOs

Michael Lloyd

November 18, 2019

Brokers were unsurprised that only 660 Retirement Interest-Only (RIO) mortgages have been taken since they were introduced by the FCA’s rule changes in March 2018.

A Freedom of Information request from This is Money to the FCA also showed that as of 1 July just 548 RIOs had been sold this year.

Brokers put this down to affordability, the fact it is a niche area and that lifetime mortgages can be more attractive.

Ray Boulger (pictured), senior technical manager at John Charcol, said the reason was due to lifetime mortgages and mainstream mortgages often proving the better options.

He said: “I’d ignore the grand total. When the FCA announced a new regulatory class of RIOs in March 2018 it was a while before anyone introduced them. But the number this year is still quite low.

“The reason is not difficult to be established. The other options available to a lot of potential customers will be a lot more attractive.

“If your LTV requirement is quite low you can get a lifetime mortgage with a rate that’s cheaper than RIOs and you don’t have to worry about proving income, which is a worry for some in the RIO market, and you’re fixed for life.

“With lifetime mortgages you are not required to make repayments, but you can choose to make payments of 10% primum with most lenders.

“A lifetime mortgage is often more attractive. A lot of people don’t appreciate their flexibility.

“And in the mainstream market there are often enough smaller lenders who don’t have a maximum age limit and very often you can get a mainstream mortgage rate cheaper than that of RIOs. They aren’t quite as good as a RIO, but a lot would prefer them with the interest rate.”

Boulger said that for RIOs to become more popular lenders need to offer cheaper rates and compete better with lifetime mortgages and the mainstream market.

He added: “I think lenders have leaned a bit. Compared with the initial underwriting with RIOs some lenders have learned and are now much better looking at complex incomes, so the market is improving in that respect.”

David Hollingworth, associate director of communications at L&C Mortgages, said that it’s a niche product area so most people would not have expected to see it take up a significant share of the mortgage market.

He said: “But it gives an alternative option for borrowers and as the number of lenders in that market and therefore the number of products in that market, increases, the uptake of RIOs would increase albeit at relatively low levels.

“It’s a product sector that’s still in its infancy. I want to see how it develops.

“The innovations of the product this year, such as evolving from short-term variable to a much broader range of deals including long-term fixed rates, has been encouraging.

“And as you get that growth of different products and product structures that should only help bring consumer awareness.

“This won’t happen overnight. We’ll see how it goes from here.”

Martin Stewart, director of The Money Group, said he believes RIO mortgages were a good idea but executed poorly.

He added: “If anything they have probably driven up the sales of equity release mainly because they are, in their purest form, very complex products for what I believe is actually a simple market.

“I have attended seminars on RIO mortgages and walked out knowing less than when I walked in.

“I don’t know how many times we have to say this, but the demographics of the UK are changing, and we need real innovation to come in.”

Family Building Society launched three RIO products in April this year.

The society’s director of business development Keith Barber blamed the low take up of RIOs on affordability testing.

He said: “At this point I think it’s mainly the affordability test on joint cases where we have to make sure either survivor in the event of a one spouse passing away first can afford the mortgage by themselves in the long-term.

“That’s the biggest stumbling block in RIOs being taken up.”

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