"The need to tap into equity is not limited simply to older borrowers or even to a straight choice between equity release or RIO."
There has been significant growth in borrowers looking to raise funds from equity in their home over recent years. Equity release products, which have been with us for quite some time, have been supplemented by retirement interest-only (RIO) as options for older borrowers looking to raise capital in retirement.
There are all sorts of reasons why a borrower in their later years might want to raise some capital against their property. For example, some may be looking to carry out home improvements to make the property better suit their needs, others could be looking to consolidate debts or perhaps help a loved one onto the ladder.
However, it’s important to recognise that the need to tap into equity is not limited simply to older borrowers or even to a straight choice between equity release or RIO. There are plenty of borrowers younger than 55 who need to raise funds for a variety of reasons, especially after the curve ball of the pandemic and the increasing trend towards home or hybrid working.
Alternatives to RIO and equity release
Capital raising on an interest-only basis can provide borrowers with some flexibility over the minimum age restrictions of equity release and RIO, and where a repayment strategy is required, downsizing later down the line can be an alternative to the sale of the property, as is certainly the case with RIO.
For this approach, brokers and their clients need to consider the term of the mortgage, how set the borrowers are on remaining within that property and being able to purchase a reasonable house when the time comes to downsize.
To ensure the borrowers are left being able to access a decent property when the time comes, we insist on a minimum equity remaining of £200,000 (£300,000 in London and the South East). With rising house prices, this approach increasingly supports borrowers in these asset rich and cash limited times.
For example, borrowers who have nourished the family home and whose children have flown the nest may well be considering a smaller property that is easier to maintain.
They can use the money saved on the capital repayments on other financial needs, secure in the knowledge that when the mortgage comes to the end of its term they will be able to repay that debt by moving on to a smaller property.
Understanding borrowers
One of the frustrations we often hear from brokers is around how rigid lenders can be. A client may have approached the broker with a perfectly sensible and understandable situation, like the parents in the example above.
However, it can prove unnecessarily complicated to access the funding needed. In many cases lenders would not even consider such a situation, given their wariness around interest-only and the use of downsizing as a repayment vehicle.
Others might consider it, but would insist on running the affordability tests on a capital repayment basis, severely impacting the sums achievable through the loan.
However, smaller specialist lenders, like Mansfield Building Society, can take a more open view. For example, we assess affordability on the interest-only repayments, giving a more realistic and appropriate impression of what the borrower really can afford with this sort of mortgage.
Similarly, by focusing on a rigorous, manual underwriting process we are able to get to grips with what is really relevant to a case. Rather than dismissing an application because some element triggers an automatic red flag, our underwriters are tasked with digging into the details so that a more comprehensive and informed decision can be made.
As brokers know only too well, borrowers should not be pigeon holed in the solutions they receive, so it’s important for lenders to adopt a more flexible and personal attitude when assessing applications.
Working together to support borrowers
Interest-only with downsizing is only one area where such an approach pays dividends. There can be apparent complications with cases which can cause an application to grind to a halt if working with a lender that relies on a more automated system of decision-making.
That’s why it’s important for brokers to identify the lenders who are prepared to work with brokers and their clients, and are keen to say yes to cases even if there is some form of supposed complexity. By operating in a more versatile way, we can support more borrowers with their needs, no matter their circumstances.
