Independent review and analysis

Retirement Interest Only mortgages – are the risks being mitigated?

We have just hit the first anniversary of the FCA Consultation paper announcing the intention to create a new term, Retirement Interest Only Mortgages [RIOs], and to exclude them from the definition of ‘lifetime’ loans.

The paper suggested that RIOs had significantly different risks compared to lifetime mortgages as the former did not feature the ‘rolling up’ of interest, meaning that consumers were not at risk of rapid equity erosion. The FCA did, however, recognise that RIOs presented a potential consumer detriment and it proposed several specific safeguards. The lending industry welcomed the proposals; lenders were already looking for new markets where extra margin could be obtained, and it is not surprising that the number of lenders offering these mortgages has grown exponentially over the past 6 months.

Although lending to those in retirement provides much needed additional margin, it is also true that products that benefit from additional margin bring additional risks! This is especially so with RIOs where the loan is repaid as a result of an event rather than a repayment vehicle, including for example, the death of the borrower or the sale of the property when the borrower moves to a care home. Historically, the principle risk associated with ‘older life’ lending was conduct risk and that remains the case today. Such borrowers would usually, by nature of age or infirmity or both, be categorised as vulnerable or potentially vulnerable.

We have seen a wide approach to RIO oversight requirements. These range from reviews of vulnerable people policies, to reviews of the lending and re-underwriting of loans on behalf of funders. We are also seeing a refocus on servicer service level agreements and the ongoing oversight of performance against them.

There is no doubt lenders have taken to RIOs very quickly, but the growth in available products in this category needs a more significant focus on risk management. We can help to support your risk assessments by bringing practical experience built over many years, so do get in touch if you would like a chat.

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