This is a question I am being asked about on an increasingly frequent basis, but defining this relatively new type of mortgage can be a touchy subject particularly for those of us in middle age who can be easily offended!
I will move onto the answer later, but to begin with let’s look at why the UK mortgage industry believes there is a market for this type of lending. The main reason for this is that the UK population is ageing, the most recent ONS report in August 2018 stated: – “Through the latter half of the 20th Century, the UK population has been steadily getting older and this trend is projected to continue in the future. In 2016, there were 11.8 million UK residents aged 65 years and over, representing 18% of the total population – 25 years before, there were 9.1 million, accounting for 15.8% of the population. Looking ahead 25 years to 2041, the 1960s baby boomers (aged in their 50s now) will have moved into older age and by 2066 there will be a further 8.6 million projected UK residents aged 65 years and over, taking the total number in this group to 20.4 million and making up 26% of the total population. This increase in numbers is broadly equivalent to the size of the population of London today. The fastest increase will be seen in the 85 years and over age group. In mid-2016, there were 1.6 million people aged 85 years and over (2% of the total population); by mid-2041 this is projected to double to 3.2 million (4% of the population) and by 2066 to treble, by which time there will be 5.1 million people aged 85 years and over making up 7% of the total UK population.” Bank and Building Societies have begun to recognise that an opportunity exists for low risk lending to clients aged 55 plus, an area which in the past has been dominated by Equity Release (ER) type mortgages, which still may be the best route, but are not ideal for everyone. These Later Life Mortgages are now seen as the main alternative to ER and have been dubbed “Retirement Interest Only” or RIO – this may be catchier in a few more years time when the target audience is the Duran Duran fanbase. This type of mortgage can be considered by those 50 and above who are looking to borrow up to 70% of the value of their main residence for a variety of reasons including: – To replace a standard mortgage To buy out a partner Home improvements To gift to family – the Bank of Mum and Dad lives on! To repay other debts Holidays, cars and other more fun things! Many other reasons – just ask! The borrower must be able to demonstrate that the mortgage is affordable based on current and investment/rental/retirement income, with interest being paid monthly and the capital eventually being repaid on the sale of the home upon death or entry into long term care. Whilst rates aren’t quite at the level of mainstream mortgages yet, they are more competitive than many ER products and at the end of any fixed rate period do not generally have the penalties which can be part of an ER product. It is rumoured that more lenders will enter the RIO market during 2021, which should have a positive effect in lowering the interest rates and fees payable given the increased competition this will bring. Overall, I think this product is a welcome development for a growing part of the UK’s population. For many people their home is their biggest (or only) asset, whilst others may see borrowing of this type as a useful option alongside their other pension and wealth management strategies. If you would like to see what our clients have to say about us we have in excess of two hundred and twenty Google 5I reviews
