Walking in the shoes of today’s RIO customer
BY Hodge Bank
If life begins at 40, then why would we treat over 50s as though it’s time to start winding down and setting aside time to browse retirement home brochures?
According to NIH research those over forty see themselves as 20% younger, which probably isn’t a surprise to anyone reading this who’s hovering around the big 4-0.
So, is fifty the new forty? And when did we say life begins?
At Hodge, we’re all about shattering stereotypes, especially negative ones. And excuse the pun, but ageism is an age-old problem. So, when it comes to thinking about what today’s RIO customer looks like, we first need to remind ourselves what fifty actually looks like.
Picture someone in their twenties. What are they likely to be doing? Saving for a house. Out socialising every weekend in bars and clubs. Forging their new career path. Getting married. Travelling the world. Starting a family. They could be any number of those things, simultaneously.
Now picture someone in their fifties. Did socialising, shopping, travelling or buying a house spring to the front of your mind? If not, here is why it should. Baby boomers are the fastest growing age group in the UK. They make up 35% of the population but contribute 76% to the UK’s financial wealth and just below half of its consumer spending. Over fifties outspend every other age bracket in recreation and culture, cars, food, alcohol, travel, household goods and services.
We may put this luxury of higher disposable income down to the generational wealth gap. Over 50% of baby boomers owned homes by the age of thirty and with surging house prices comes increased wealth. The reality is many homeowners have their equity tied up in their property. Or they may be paying or looking to move to interest-only mortgages to keep outgoings lower.
In 2018, Hodge became one of the first in the UK to offer RIO mortgages. The FCA recognised some borrowers, who can afford interest-only payments and keep equity in their home, were struggling to find a mortgage which would see them through their current and their retirement years, that’s where RIO came in.
The Hodge RIO mortgage is as unique as the customer, it’s never been a one size fits all mortgage, and demand is increasing. The RIO market as a whole is growing and in the past three months, the volume of our RIO new business has been a third higher.
In the past three years, we’ve seen a year-on-year increase in debt consolidation as a reason for applying for a RIO mortgage as the cost of living continues to bite. And it’s not just our over 50s customers who are feeling the pinch, their children and grandchildren are as well. Hodge data shows customers releasing equity as part of their RIO mortgage has tripled, seeming that the ‘the bank of mum and dad’ remains very much in business.
Alarmingly, a recent survey of our brokers shows two out of three consumers believe those in the later-life lending demographic are underserved and many have no awareness of RIO. We want to support those over 50, the mortgage market and our brokers in raising awareness about how RIO mortgages could be the right answer for your clients’ mortgage needs and make a great alternative to equity release for the right customer.
Among other things, RIO can be useful for clients who have come to the end of their existing interest-only mortgages and are unable to repay the capital balance. They are, however, able to afford to continue paying interest for the life of a mortgage.
The benefits of RIO mortgages can sometimes get undersold against the familiarity of the equity release product. Although they both allow homeowners to turn their property's value into available cash, they have different benefits.
It’s undeniable that equity release has a clear and prominent place in the later life lending market. But in recent months, the demand has plummeted. According to the Financial Reporter, April to June of this year saw a 5% drop on the previous quarter and the quietest lending period since 2016. The rising interest rates coupled with a reduction in maximum LTVs available means customers are able to borrow less. On the flipside, Hodge has seen a slight increase in the average LTV of RIO mortgages compared to 2022.
RIO or equity release?
Equity release, often referred to as a lifetime mortgage, allows the homeowner to borrow a portion of the property’s value. There are usually no monthly repayments to make. The loan, plus roll-up interest is repaid on death or a move into long term care and the property is then sold. The debt grows over time potentially, eroding the value of the property and the younger the borrower the less % value they can unlock. It’s generally available from age 55 with LTVs on average at around 20%.
With a RIO, interest is paid each month based on the chosen rate. Much like any residential mainstream mortgage the customer makes monthly payments, but the capital element of the mortgage remains outstanding with no end date or term. The capital element of the loan won’t need to be repaid until the last remaining borrower moves permanently into long-term care or passes away. We also offer up to 75% LTV from age 50.
Yes, with RIO there are affordability checks, but the assessment will uncover if the client has sufficient disposable income to pass the affordability stress test and potentially mean RIO is the best product and best outcome. With a RIO, the interest roll up is negated so unlike equity release where there is likely to be less equity in the property left to pass onto family after death, a RIO mortgage offers more certainty.
The type of clients who might opt for equity release probably aren’t the type of clients who consider RIO, but that’s a good thing for later-life specialists. RIO gives you an extra string to your bow meaning you can offer a truly holistic approach to advice, which is more important than ever with the Consumer Duty regulations now in force. The essence of Consumer Duty is that financial service firms are providing customers with products and services that meet their needs and offer fair value and that consumers are then able to make good financial decisions based on this advice. By knowing the whole later life market and the products which fall within, advisers can meet these requirements and deliver great customer outcomes.
We’ll work with you to become RIO fluent
We know RIO is a niche product for a niche market, we understand affordability and all that comes with it can seem daunting, but we’ll work with you every step of the way until you speak RIO like a pro. From BDM support to underwriters who believe in common sense and the human touch, we’re always working with you. Hodge has your back.
Hodge: a specialist lender
We have an established history in the later life lending space, having been founders of the first equity release mortgage back in 1965. We focus on what the customer wants, that’s why we’ve fully taken the plunge into alternative, specialist over 50s’ mortgage lending. Our goal, to drive innovation in the market and meet the needs of the ever-changing face of today’s over 50s borrower. Their retirement, however, that may look and everything that comes next, no longer follows a stereo typical path, so neither do our mortgages.
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