The retirement interest-only (RIO) mortgage has been created in response to demand from older borrowers who were keen to secure their rate for longer.
Leeds Building Society was one of the first lenders to launch RIO mortgages back in July last year, just after the regulator, the Financial Conduct Authority (FCA), redefined interest-only deals as standard mortgages.
RIOs allow customers to make interest-only payments to their loan. Capital is eventually paid off using the sale of the property, an event which usually takes place when the owner dies or when they move into residential care.
Demand from RIO customers
Leeds’ latest offering, which will be available on 30 July, comes following the launch of a five-year RIO and then a 10-year version. According to Leeds 70% of its applicants were seeking a fixed term of at least five years and nearly one in six of its RIO mortgages had 10-year fixed rates.
It also revealed the top reasons customers took out RIO mortgages, with home improvements, like-for-like remortgages and debt consolidation being the most common motivators.
Leeds said that while RIO mortgages were a completely new market, guidance from the regulator and its own research meant they expected a ‘strong demand’ when the products were launched.
Supporting more borrowers
Matt Bartle, Leeds’ director of products, explained: “Bearing in mind the UK’s demographic and the changes to how people are managing their financial commitments during later life, we anticipate the demand for RIO will carry on increasing as older borrowers seek greater choice, alongside more established options such as equity release and lifetime mortgages.
“The last 12 months bears this out and we’ll keep our product offering and lending criteria under review so we can support more borrowers wanting to make use of this type of home loan.
“As a mortgage lender for more than 140 years, we’ll use our expertise and experience to carry on meeting the needs of more borrowers to enable them to have the home they want.”
There are two options available for those interested in Leeds’ 15-year RIOs. One is a fee-free mortgage, which has a rate of 4.54%. There is also a 4.34% rate available with a £999 fee. The RIO mortgages are available to borrowers aged between 55 and 80.
The experts’ verdict
Rachel Springall, finance expert at Moneyfacts.co.uk, said it was important potential borrowers weighed up the differences between lifetime mortgages and RIOs to make sure they select the right deal for them.
She explained: “RIOs offer a solution to older borrowers who feel they have nowhere to turn and as people are living for longer, it means that they could hold a mortgage for longer too.
“The mortgage market has gradually incorporated more RIO deals, but it continues to be the case that building societies are mainly fuelling this niche arena.
“It’s important that consumers make every effort to pay off any debts and plan ahead to make enough pension provisions to fund their later life.”
Meanwhile Nicholas Morrey, product technical manager at mortgage broker John Charcol said this was a welcome addition to the RIO market. He added: “Many mature borrowers would welcome the longer term security provided by a 15-year fixed rate compared to a product that runs out in five years or less.”
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