Hodge Launches the First RIO with a Fixed Rate for Term
Written on 24 September 2019 by
Hodge has become the first lender to launch a RIO (retirement interest-only) mortgage with a rate fixed for life, whereas in the mainstream market the maximum term one can fix for is 15 years. It has taken nearly 18 months from when this new product category was created by the FCA but the RIO market now offers a full range of rates from discount products, including some with no ERCs, to a wider range of fixed rates than is available in the mainstream market with fixed rate choices of 2, 3, 5, 10 and 15 years plus the term of the mortgage, which could be over 50 years as the minimum age for the Hodge RIO is 50!
The Hodge RIO fixed for life rate is 4.35%, with a fee of £995, and although the rate is on the high side, as are RIO rates generally, it is a unique product with some good criteria and so will be a useful additional option for some homeowners, either for purchase or re-mortgage.
The minimum age of 50 is lower than on most RIOs and the maximum LTV of 70% higher than most. Furthermore, it has much lower ERCs than most mainstream or RIO 10 - 15 years fixes, with the ERCs starting at 5% for the first 4 years and then reducing to nil after year 8. As the rate is fixed for life affordability is calculated at pay rate rather than the stressed rate of about 7% or more used for most residential mortgages.
Borrowers who have not retired will have to meet the affordability assessment based on retirement income as well as current earned income. A projection will be used for pension income, assuming ongoing current contributions, and other projected income such as any rental income or other investment income can also be taken into account.
Assessing affordability on an interest only basis and at pay rate will in many cases at least compensate for the likely lower income in retirement when assessing the maximum loan, compared to a standard repayment mortgage to retirement age, assuming applicants can demonstrate a reasonable level of retirement income.
Many potential borrowers will only need an LTV well below Hodge’s maximum 70% LTV but may not be old enough to meet the minimum age of 55 or 60 set by most lenders for their RIOs. Others may be old enough to satisfy other lenders’ minimum age criteria but may need a higher LTV than the 50% or 60% maximum set for their RIO by most lenders. Many will not be able to satisfy affordability criteria based on a stressed rate but could when calculated at the much lower 4.35% pay rate and many will be uncomfortable with the high long term ERCs on most other lenders’ fixes for 10 years or more.
It is the combination of all these features which make this such a well-designed, as well as unique, product. Some people will choose it because they like the idea of a rate fixed for the rest of their life and consider it worth paying the higher rate compared to a shorter term fix. Others may find it is one of the few products where they can meet all the criteria.
As with most mortgages up to 10% p.a. can be overpaid without incurring any early repayment charges and so even someone who wants a repayment mortgage but struggles to meet lenders’ affordability criteria might find this mortgage useful. They could create their own personalised repayment schedule if they wish, with the freedom to change it if necessary and the financially sophisticated borrower who might not be sure when they are going to retire might find this degree of flexibility very attractive, although of course this can also be achieved with other interest only mortgages. The broker could advise how much should be overpaid to pay off the mortgage over whatever the preferred timeframe is.
Should the homeowner die, go into care or even just sell the property during the 8 year ERC period the ERCs are waived on this Hodge RIO, although it can also be ported, subject to the usual conditions. Some lenders will waive ERCs on mainstream products if the borrower dies during the fixed rate term, but this is usually a concession rather than guaranteed as a part of the product spec, although of course it is a standard feature on Lifetime Mortgages.
Some borrowers who want a fixed rate for the rest of their life will find a Lifetime Mortgage (also known as Equity Release) better value. Lifetime Mortgage rates now start under 3% (at which rate the debt only doubles every 26 years) and the lower the LTV the lower the rate, with the maximum LTV available at the cheapest rate increasing with age.
Although Lifetime Mortgages are structured as a roll up and so no repayments are required, most allow payments of up to 10% p.a. and so they can effectively become an optional interest only mortgage if required. However, most have more onerous ERCs than on the Hodge RIO, some percentage based, and others mark to market, capped at 25%.
At low LTVs a cheaper fixed rate for term than the 4.35% offered on the Hodge RIO is likely to be available from a Lifetime Mortgage and so understanding the trade off between rate and ERCs (and the different types of ERC on Lifetime Mortgages) is something borrowers will need to consider carefully and on which an independent broker can advise.
The cheaper rates available at low LTVs on Lifetime Mortgages are likely to result in Hodge seeing applications bunched at higher LTVs and so once enough time has elapsed to allow it to make a meaningful assessment of applications I would like to see Hodge introduce an additional LTV tier with a lower rate, say a sub 4% rate for LTVs up to, say, 50%, to make the product more competitive for borrowers only needing a low LTV.
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