FCA urged to relax lifetime mortgage rules

Amendments to the Mortgage Conduct of Business rules following MMR mean that lifetime mortgage contracts which permit, but do not require, consumers to pay interest for a period are subject to the requirement of providers to assess their affordability.

The Council says this is despite the fact that payments of interest are always optional and that customers will never be at risk of losing their home as a result of being unable to continue with interest payments.

As a result, some customers who would have taken out a lifetime mortgage giving them the option to repay interest for as long as they wished might not now pass affordability assessments, may be reluctant to subject themselves to the assessment process or be recommended alternative products.

The Council has asked the FCA to consider whether a relaxation of rules originally designed for residential rather than lifetime mortgages would help more consumers unlock their housing wealth while protecting a larger amount of equity in their property. It added that a relaxation might also support existing providers’ ability to expand their product range and encourage new entrants.

It also recommended that the FCA engages with the Prudential Regulatory Authority to consider how equity release is currently funded, the extent to which current prudential requirements create barriers for firms, and whether a broader approach could be taken which would enable alternative sources of funding to be accessed.

Nigel Waterson, Chairman of the Equity Release Council, commented:

“We welcome the proactive decision by the FCA to review whether there are any barriers to competition in the mortgage sector. Retirement lending is a crucial part of this and there needs to be careful consideration of the factors which differentiate ‘residential’ and ‘lifetime’ borrowing.

“As part of our wide-ranging input we highlighted that revisiting affordability rules may help more consumers to make use of options already offered by equity release providers in later life, as well as encouraging more new entrants to the market.

“There is a growing recognition that equity release has an important part to play in the planning of funding for later life, and we look forward to working together with the FCA on the back of its findings.”

Andrea Rozario, Chief Corporate Officer at Bower Retirement Services, added:

“Nearly half of advisers (46%) questioned by Bower say offering more retirement lending solutions would help maintain the strong growth in the equity release market, but it is about more than that.

“There is demand from retired homeowners who are creditworthy but are being excluded by current affordability rules. The past few years have seen the pace of innovation pick up but advisers want to see more products and specifically ones which address the interest only issue and enable mortgage customers to move seamlessly into equity release or other solutions where suitable.”