Examining the trends in the space and the market outlook
Retirement interest-only (RIO) mortgages’ popularity has grown in recent years as the wider economic climate has reduced affordability for many homeowners.
The product is often compared to equity release, but is seen as more favourable when looking to leave an inheritance. By reducing the size of an individual’s estate in advance, there may be a smaller inheritance tax bill when the homeowner dies.
So is the product’s momentum likely to continue into 2024?
What are the current trends in the RIO market?
Andrew Bell (pictured), executive board member at Hampden & Co, said RIO mortgages stand out for their simplicity, making them accessible to clients across the board.
In particular, he pointed to their use among high-net worth individuals with assets exceeding £3 million, with it playing a primary role in estate planning as the debt is established for the end of the mortgage.
“This aligns with the broader trend of intergenerational wealth transfer among the wealthier population in the UK, as people increasingly recognise the value of efficient tools for passing on their wealth to future generations,” Bell said.
How buoyant is the RIO market at present?
Against the backdrop of a market marked by steadily rising interest rates over the last year and a half, Bell said, there has been a noticeable dip in confidence among clients.
“Regardless of wealth, people tend to favour certainty, and the earlier part of this year brought about significant uncertainty, affecting lending demand across the board,” he said.
However, as we move past this turbulence, Bell said there is renewed interest in borrowing, particularly in the lifetime mortgage segment of the market.
While it might not reach the levels seen during the pandemic when funds were cheaper, he added, there has been a return to more typical demand levels.
“Interestingly, this resurgence comes despite the UK being arguably at the peak of the interest rate cycle,” Bell said.
“Speaking specifically about RIOs, our interim results indicate a notable increase in demand over the last three years, constituting around 7% to 8% of our total net,” he said.
While RIOs remain a niche product, Bell added that this growth aligns with a better understanding of their benefits among clients.
What are the challenges in the market right now?
Despite the return of some certainty, Bell said the challenge facing the RIO market lies in the increased cost of funds, impacting affordability for both lenders and borrowers.
Bell said it is the core responsibility of lenders to clearly communicate the features and benefits of their products, engaging in mature discussions on affordability.
“Whether it is a standard residential mortgage, a RIO loan, or a niche product like a self-build loan, transparency is crucial,” he said.
With the growing certainty in the rate cycle, Bell added, these products are only becoming more understandable and quantifiable.
What are the expectations for the RIO market in 2024?
While the outlook for RIO mortgages remains positive, Bell said, affordability has become a key focus, more so than in recent years.
“Looking ahead to next year, I do not anticipate a significant drop in rates, there might be some easing, but I expect only a modest rate cut in 2024; inflation’s persistence plays a role in this cautious approach,” he said.
As RIOs become more prevalent, drawing closer to the mainstream, Bell anticipates more lenders offering some form of retirement interest products. However, due diligence remains crucial to ensure the product is affordable throughout the client’s life.
“This level of scrutiny and manual underwriting sets RIOs apart; while more providers may enter the market, widespread adoption is not foreseen, given the need for in-depth client conversations, a specialisation we value,” he said.
How is the RIO market performing at present and what are your expectations moving into 2024? Let us know in the comment section below.
