"They must be capable of reaching a wider audience, and that all comes down to how easily applicants pass affordability tests."
The number of RIOMs sold between July and September last year rose 97.2% to 761 — up from 386 in the same quarter of 2020 — according to FCA data obtained through an FOI request.
However, this only represents 0.22% of the 341,227 mortgage products sold across the quarter. In real terms, this is only a marginal improvement on the 0.11% (1 in 910) recorded a year earlier (Q3 2020).
RIOMs were designed to remove age as a barrier to remortgaging for borrowers who cannot repay their traditional interest-only mortgages when they hit retirement. They were made possible by a relaxing of affordability tests by the FCA, and these changes meant that borrowers no longer needed to demonstrate that they had a long-term repayment plan, they just have to show they can afford the monthly payments.
However, RIOMs are still struggling to attract a significant following and Responsible Life says suspicions remain that RIOM affordability tests remain too rigid for most homeowners. They are still subject to sole survivor rules which means that joint borrowers must each show they can afford the monthly payments on their own should the other die.
If they can’t, many of these homeowners are too young to take out a lifetime mortgage, and end up stranded on lenders’ SVRs unable to refinance.
Responsible Life has previously called for two important changes to be made to RIOMs that would solve this problem:
• Lifetime mortgages should be regarded as a permitted repayment plan for RIOMs, once borrowers get older or a partner dies.
• The sale of the property should also be a valid long-term repayment plan should either partner die.
In their current form, Responsible Life believes RIOMs will never become a mainstream financial tool for retired homeowners despite there being huge demand for them.
There were still 908,000 pure interest-only mortgages outstanding at the end of 2020, according to latest UK Finance data.
When they were launched in March 2018, the FCA predicted that around 21,000 RIOMs would have been sold by 2021. However, only 3,213 had been sold by the end of 2020, rising to 5,029 by the end of September 2021.
Steve Wilkie, executive chairman of Responsible Life, said: “Sales of RIOMs have doubled annually but this was from a very low base. It still has to be said that progress has been poor and RIOMs still aren’t making a dent in the problem.
“Hundreds of thousands of people face hitting retirement with conventional interest-only mortgages they cannot repay and RIOMs could be a tremendously useful product. But they must be capable of reaching a wider audience, and that all comes down to how easily applicants pass affordability tests.
“This is something this product was specifically designed to assist with, so perhaps it’s time policymakers looked again at the way they’re structured to avoid creating new mortgage prisoners.
“The situation could worsen this year, exacerbated by the cost of living crisis. Borrowers applying for RIOMs need to be able to demonstrate they can afford the monthly payment so a squeeze on household budgets could result in even fewer consumers being able to access them.
“The sole survivor rule is one key area that could be overhauled, because it means that each individual borrower must show they can afford the monthly payments on their own. An easy way around this rule would be to allow borrowers to plan for the sale of their home as a repayment vehicle, or convert their RIOM into a lifetime mortgage when it makes financial sense.”
