Majority Of Over 55s Will Struggle To Acquire Retirement Interest-Only Mortgages
Interest-only mortgage borrowers looking to take out a retirement interest-only (RIO) loan are struggling to acquire this preferred loan choice because they have not paid enough into their pension to help fund the repayments in their retirement.
According to Royal London research, hundreds of thousands of interest-only borrowers are coming to the end of their loan agreements within the next five years and do not have a clear and obvious way of paying off the capital balance.
The Financial Conduct Authority (FCA) found that 10% of all interest-only loans do not have a repayment plan with 50% of loanees likely to suffer a shortfall.
In December 2018, 550,000 borrowers over the age of 55 had taken out an interest-only loan; making up a third of the 1.66 million total.
Royal London suggest that this figure indicates 275,000 borrowers approaching retirement will struggle to acquire a RIO loan and will therefore face working beyond their intended retirement age, forced to downsize or consider equity release.
Royal London further speculated that an average UK earner will need to have accrued around £260,000 into their retirement pot. If the earner wishes to take out a RIO loan, an additional £118,256 will need to be paid into the pension scheme if they are to successfully service the debt until they die.
Over 12 million people are failing to save enough money to cover basic living costs during retirement, let alone pay enough in to help service the interest on a RIO loan. This will mean the majority will fail strict ‘affordability tests.’
Currently, tests are based on the total pension income once the main breadwinner dies as opposed to the joint income or higher earners income whilst the borrower is alive. This makes the criteria very different from most traditional mortgage affordability tests. Given the fact that pensions can depreciate once a person dies, the pension pot needs to ensure it can cover the debt, even in the case of the person’s death and the reduced income.
Becky O’Connor, Personal Finance Specialist at Royal London, said:
“The introduction of RIOs may give false hope to hundreds of thousands of borrowers with interest-only loans they can’t pay off at the end of the term. These loans might seem like the perfect solution, but in practice, because of affordability criteria, they will not be the answer for most people.
“Generally speaking, pensions are not designed to cover housing costs. Target pot estimates assume that people who are homeowners have already paid off their loans and will only need to cover other essential living costs, like food and energy bills, in retirement.
“So even those who have a ‘decent’ pot size of £260,000 might find they wouldn’t have enough income in retirement to pay RIO mortgage repayments and still maintain a decent standard of living. With many people not saving enough in a pension even to cover basic living costs in retirement, many borrowers are likely to have an application for a RIO mortgage rejected or be offered a much lower amount than their shortfall.
“It’s likely that uptake of RIOs will therefore be reserved for those endowed with the most generous pensions, or income from other sources such as property or work.”
Have conveyancers dealt with people struggling to take out a RIO loan in later life?