Claire Barker is managing director of Equilaw
At the National Later Life Adviser Conference in June, former FCA mortgage policy manager, Lynda Blackwell questioned the residential approach that the regulator had chosen to take towards RIO mortgages and of the problems that this silo approach had caused for markets.
She also spoke of the intense lobbying which the FCA had received from banks and brokers to implement this policy, while asserting that “many older people will have no chance of meeting the affordability requirements in this area”.
But, what are the risks associated with these types of later life mortgage? RIO mortgages allow borrowers to remortgage existing interest-only deals or to release equity capital as a long-term loan against the value of their property, with the outstanding capital debt deducted from the proceeds of the sale once the mortgage holder dies or moves into long-term care.
They are often seen as a similar proposition to lifetime mortgages, although RIO customers are obliged to repay the interest that has accrued against their loan on a monthly basis, while lifetime mortgages roll up interest payments against the value of the loan.
Under the terms of the 2015 Mortgage Credit Directive, for example, both RIO and equity release products were classified as lifetime mortgages, although many lenders had stopped offering RIOs to customers by this time because of the lack of professional qualifications needed to sell them.
However, as wave upon wave of interest-only mortgage deals came to maturity in the ensuing years, the FCA came under increasing pressure to remove the barriers to RIO sales and promote their use as a salvation for those existing interest-only customers with no repayment plan beyond the terms of their deal.
Consequently, the FCA decided to reclassify RIOs as standard mortgages in March of last year.
Yet, many observers and experts regard the re-introduction of RIOs as little more than a false dawn for interest-only borrowers, with recent research by the insurance company, Royal London, warning that “very few (RIO customers) will be able to afford the cost of servicing a mortgage debt” or of maintaining post-retirement living costs over the term of a loan.
According to official figures, up to 12 million people in this country are failing to save enough money to cover even basic retirement living costs.
And with hundreds of thousands of interest-only borrowers coming to the end of their loans over the next five years, Royal London has warned that around 275,000 RIO applicants could fail the affordability tests applied by lenders as a result.
Which means that we are left with a set of circumstances which ultimately precludes the very people that RIOs are designed to help, leaving vast constituencies of borrowers with little choice but to carry on working beyond their retirement age or to downsize to a smaller property.
And for those customers who do manage to pass criteria tests, the threat of repossession or of tumbling living standards could prove to be an ever-present drain.
However, there are other, substantial risks to take into consideration when looking at the pros and cons of a RIO mortgage, not least the lack of underlying legal advice or support for these products.
For example, under Equity Release Council guidelines, prospective ER customers are obliged to seek independent legal guidance and to consider a range of alternative lending options before they are allowed to proceed with a loan, thereby offering clients the security and protection of impartial third party assistance in addition to the advice given by advisers throughout the application process; advice which is, itself, dependent upon the attainment of specialist equity release qualifications.
However, there are no such requirements for RIO customers under mainstream mortgage rules, with borrowers merely having to prove that they are able to afford interest payments.
Yet, given the omnipresent threat of repossession or of vulnerable clients being pressurised into releasing equity via RIOs by family members or other parties, the absence of a process or mechanism by which to evaluate whether customers have the mental capacity to understand the long-term nature of their contracts or the possible consequences has raised particular concern.
Indeed, Blackwell has pointed to “the same need for advice and support with a RIO as there is with equity release” and highlighted the problems which the FCA has created.
This, in turn, has led many people within the mortgage industry to call upon the regulator to introduce mandatory legal advice for customers considering RIO mortgage products and to help mitigate the risks that products such as these can pose.
Moreover, with large numbers of RIO advisers lacking the qualifications needed to advise customers on equity release products, many experts feel that the introduction of an obligatory legal process would help to reduce the chance of clients choosing unsuitable mortgage options.
It is a matter of some incredulity to suggest that lifetime mortgages offer a higher than average level of risk to financial customers when a product which is largely unaffordable, offers no legal advice, supports a high risk repayment structure and increases the likelihood of repossessions is allowed to operate in the same market as ER and is offered to the same types of customer.
And with RIO mortgages accounting for a paltry 353 sales between March of last year and April 2019 (according to official FCA figures obtained by This is Money), it would appear that many property consumers feel the same way. Long may it last.