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 November 2018 stated:
– “With ongoing advances in technology, healthcare and lifestyles, people in the UK are living longer on average than they might have in years gone by. In 1997, around one in every six people (15.9%) were aged 65 years and over, increasing to one in every five people (18.2%) in 2017 and is projected to reach around one in every four people (24%) by 2037.
An estimated 18.9% of the population were under 16 years old and 62.9% were aged 16 to 64 years in 2017. According to projections, the population share of later-life age groups is set to increase further in future years too. By 2041, the 1960s baby boomers will have progressed into their 70s and 80s, and by 2066 there could be an additional 8.6 million people aged 65 years and over in the UK – a population roughly the size of present-day London. This would take the UK’s 65 years and over age group to 20.4 million people, accounting for 26.5% of the projected 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 most appropriate option, 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
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This type of mortgage can be considered by those 55 and above who are looking to borrow up to 55% 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.
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 2019, 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.
Paul Hardingham and Tony Ibson are Mortgage and Protection Advisers at Innovate Mortgages and Loans. Both have over 20 years of experience advising individuals and businesses across the North East of England. They can be contacted for bespoke advice at paul@innovateml.co.uk or tony@innovateml.co.uk or call 0191 223 3514.
