8th August 2019
The former FCA mortgage policy manager, Lynda Blackwell, has called upon the regulator to reconsider its approach towards later life lending and to review the current disconnect between the rules governing Retirement Interest Only (RIO) mortgage sales and advice and the “thorough and comprehensive set of rules” that are applied to equity release products. Speaking at the National Later Life Adviser Conference in June, Blackwell, who spent over ten years with the FCA and is considered as one of the principal architects of the Mortgage Market Review, 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 both 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”- a worrying prognosis. But, what are the risks associated with these types of later life mortgage and why do so many people see them as a ticking time bomb?
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. Nevertheless, there are some other, stark differences. 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 RIO’s to customers by this time because of the lack of professional qualifications needed to sell them and the woefully inadequate sales process which underpinned applications. In short, they were seen as something of a risk or gamble. However, as wave upon wave of interest-only mortgage deals came to maturity in the ensuing years, the FCA came under increasing pressure from both banks and brokers to remove the barriers to RIO sales and promote their use as a salvation for the hundreds of thousands of existing interest-only customers with no repayment plan beyond the terms of their deal. Consequently, the FCA decided to reclassify RIO’s as standard mortgages in March of last year, with a supporting cast of lenders and building societies jostling to position themselves at the forefront of this ‘lifeline’ revolution.
Yet, many observers and experts regard the re-introduction of RIO’s 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 because of a potential shortfall in their pensions savings. Indeed, the research has calculated that borrowers would need to amass average pensions of around £380,000 in order to cover affordability tests and to service the debts associated with RIO mortgages until they die. Yet 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 5 years, Royal London has warned that around 275,000 RIO applicants could fail the affordability tests applied by lenders as a result- a nightmare scenario. Which means that we are left with a set of circumstances which ultimately precludes the very people that RIO’s are (supposedly) 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 on their peace of mind.
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 in order to qualify for loans. Yet, given the omnipresent threat of repossession or of vulnerable clients being pressurised into releasing equity via RIO’s 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 of missed repayments has raised particular concern. Indeed, Lynda 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 by placing a disparity between the respective products. 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 to people with poor mental health as well as low literacy, numeracy or financial capabilities (etc). 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 (potentially on the basis of compromised or ill-informed advice) or of discounting product options which are a better fit for their needs and circumstances.
In fact, it is a matter of some incredulity to suggest (as the FCA does) 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 routinely 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 the This is Money website via the Freedom of Information Act), it would appear that many property consumers feel the same way. Long may it last.
