Lending Criteria – RIO
This section of our criteria is all about Retirement Interest Only (RIO). We have broken each element down, please click the required link from the list below to read each element.
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These are a specific category of mortgage and the following applies:
The FCA has a new defined term – “retirement interest only-mortgage”. This is restricted to older consumers, of which the lender will define the age of the ‘older customers’. The Society has defined age 55 as ‘older customer’, based upon the rationale that 55 is the minimum age a person can officially retire and/or access their retirement funds.
The customer will make monthly interest only payment to the Society and like all regulated mortgages the customer will be required to pass the Society’s affordability assessment. This assessment includes the mortgage remaining affordable at the Society’s stressed mortgage interest rate of 6%.
In the cases of joint applicants, given the inevitability of a life event occurring during the course of the contract, lenders have to take into account the ability of a single customer to pay the loan.
RIO mortgages are significantly different to lifetime mortgages. In particular they do not feature the roll-up of interest, ensuring that consumers are not at risk of rapid equity erosion.
These mortgages will be an important product option for many customers coming to the end of an interest only mortgage term who have equity. Alternatively customers may wish to release equity from an unencumbered property to aid their retirement living
We will not seek full repayment of the loan until the occurrence of one of the specified life events;
- Sale of property due to death for a single customer;
- Sales of property due to death of the remaining customer in the event of a joint mortgage;
- Moving in to residential care or
- Alternative living accommodation i.e. moving in with family.
Applicants must already be retired at the time of application.
The following are acceptable
Private Occupational Pension: 100%
SIPPs Pension: 4% (this figure needs to be entered as the annual amount)
State Pension: 100%
Investment Income: 100%
Net BTL Income: 100%
The following are not acceptable
Child Tax Credit
Working Tax Credits
Other DWP Benefits
The Society will consider applicants who are working, earned income will NOT be taken into account. For details of what is permitted refer to Employment Criteria
For joint mortgages each applicant will need to afford the mortgage in their own right. This will be evidenced by the lower income applicant completing an Individual Affordability Assessment Form or both applicants completing one if there are additional financial commitments to be taken into consideration. A joint income multiple can be applied to these applications.
For joint mortgages the property must be held as Joint Tenants (Tenants in Common are not acceptable)
Near Prime applicants will not be considered.
The mortgage process is regulated and therefore will follow MCOB rules around documenting affordability and making sure that the customer receives the correct advice.
The customer should be informed of the risks should their income decrease in future and the implications of this.
You must make the customer fully aware of the following regulatory elements before the customer applies for the mortgage:
- The customer should consider taking advice with regards to the potential implications on their tax position and entitlement to any benefits if they are borrowing additional funds to release capital from their home. Further information about this can be found from HM Revenue & Customs, the Pension Service and / or the Citizens Advice Bureau.
- A lifetime mortgage may be available and more appropriate for their personal circumstances.
- Restrictions as to who may live in the property may apply.
Potentially the customers looking to take out these mortgages may be classed as a vulnerable customer and as such the adviser needs to ensure that they fully understand the implications of this type of mortgage and what they are signing up for.
If at any point the adviser feels that the customer doesn’t understand the process will be brought to a stop. Throughout the mortgage, should any staff member become aware of a potential vulnerable customer, actions can be undertaken to protect the customer.
Power of Attorney (POA)
The customer should be made aware of the importance of having a Financial Power of Attorney (POA) in place. This is referred to as a Lasting POA, which replaced the Enduring POA, either are acceptable. During the mortgage interview there will be specific questions regarding this on the Fact-find that will need completing. If the customer does not have a POA in place they should be provided the LP9 form from the Office of the Public Guardian which gives the customer information regarding this. The form can be found on the internet.
If the customer has a POA in place you do not need to see evidence of this, you only need to record that they have one on your fact-find. A condition of the mortgage will be that the solicitor confirms that the customer has one in place.
Applications must be made by the Applicant.
Use of Funds
The funds raised can be used for any legal purpose (except gambling debts). This always forms part of the advised mortgage process and if at any point the mortgage adviser was concerned about the applicant the mortgage would not be granted. We are bound by regulation to promote responsible lending.
If the customer has to go in to a temporary home in the future, they may have to pay both the mortgage and the home costs. The affordability assessment will take into account the possibility of a rise in rates, but also a potential change in the customers’ circumstances in the future. Also available to The Society is the forbearance process should the need to provide a level of support during a period of financial difficulty.
At the end of the mortgage, be it on death or any of the reasons listed above the mortgage will have no early repayment charges. This removes a financial hurdle at a difficult time. In most cases the property will be required to be sold to redeem the mortgage. If there insufficient funds within the estate to maintain the monthly mortgage payment during this time, interest payments under forbearance could be suspended for a period whilst the property is actively marketed.