These blogs are written by third party guest authors to help provide additional insight and perspective.
As part of our later life mortgages and borrowing blog series, we’re delighted to share this post with you from Paul Broadhead, Head of Mortgage and Housing Policy at the Building Societies Association.
At the heart of all building societies are the people and communities that they serve. They each have a rich heritage of making a positive difference to their customers, supporting them through every stage of their life. It’s not surprising therefore that the majority of Retirement Interest Only mortgages (RIOs) – mortgages for older borrowers – are provided by building societies.
A changing society
As a nation we are working and living longer.
Life expectancy rates have been steadily rising and we can now expect to live 42% longer than our ancestors in the 1920s - a testament to the success of improvements in nutrition, hygiene and control of diseases.
At the same time, we have seen changes in the ownership of the homes we live in. In the 1920s around 80% of people rented their homes, whereas today around 65% of the UK population own their own home.
In more recent times, the value of these homes has increased exponentially – according to the Nationwide House Price Index in the last 20 years the average house price has increased from £87,638 to £242,709. On the face of it should make many longstanding homeowners wealthy individuals, however, the reality is that many of todays over 60s homeowners might not have the capital at hand to do everything they would wish to do in their retirement, despite potentially having significant wealth through the equity in their home.
How we work has also changed, with most people working for a number of years longer than their grandparents did, and many longer than their parents. With no official retirement age, many people are or are planning to work beyond 65 which means they may have income to make mortgage interest payments.
Why do we need RIOs?
Introduced in Spring 2018, RIOs aim to help more mature borrowers live a little better in their later life. They are aimed at those who are able to continue with monthly mortgage payments, but want to keep them as low as possible. RIOs also have no end date so they give the borrower peace of mind that their outstanding loan will not need to be repaid until the sale of the home, usually when they move into long-term care or die.
Before designing and delivering any new product, building societies look at who the potential customers might be. With RIOs there are mainly two types of borrowers for whom it could be a useful choice:
1. Keeping people in a home that they love
Those who have an existing interest only mortgage that is nearing the end date but they do not have the means to repay the outstanding loan. For these borrowers, if they can continue with their interest-only mortgage payments, a RIO enables them to remain in their home secure in the knowledge that their outstanding debt will be paid when their home is eventually sold.
RIOs could also be used as a useful bridge to giving someone a few extra years in their home before choosing to downsize
2. Giving people the pleasure of spending
There are many reasons older borrowers might want to release some of the equity in their home. It could be to fund new adventures in their retirement, to help family through the so-called Bank of Mum and Dad or to make improvements to their home.
Whilst equity release mortgages are available, these usually come with compounding interest rates that eat into the equity. For those who want to retain as much equity in their home to pass on to their loved ones, a RIO can be a good alternative if they can afford to maintain the monthly interest payments.
It’s not so long ago that anyone over the age of 60 would struggle to find a mortgage that would see them through to their retirement years. Building societies have always evolved to ensure they respond to changes in our society and how we choose to live our lives. Providing mortgages in later life through RIOs is just another great example of building societies continuing to adapt, and it’s not surprising that 20 societies are already offering these to their customers.
If there was one USP that makes me proud to represent the building society sector it is that they don’t follow the principles of one-size fits all, they look at the needs of their customers and then find ways to meet them, and RIOs is just another great example of this at play.
Guest post supplied by Paul Broadhead, Building Societies Association. By publishing and hosting information from guest authors on the Ipswich Building Society website this does not constitute an affiliation with, nor a recommendation of, any third party organisation. We recommend that if the content of this article applies to you, or if you require further information on the particular topic it raises, that you seek specialist advice.