Proposed changes to the definition of a lifetime mortgage following the European Mortgage Credit Directive have far-reaching implications for new product development and could erode “safeguards” around equity release mortgages, according to Andrea Rozario.
Ms Rozario, former director general of the Equity Release Council and now chief corporate officer at Bower Retirement Services, told FTAdviser that the changes have somewhat flown under the radar, but that the directive could fundamentally alter the definition of a ‘lifetime mortgage’.
The present rules distinguish between ‘regulated standard mortgage contracts’ and ‘regulated lifetime mortgage contracts’, the latter of which are governed by separate rules.
Ms Rozario explained that the most significant change is the removal of reference to ‘older customers above a specified age’, as well as a sweeping redefinition of standard mortgages to include anything that includes an element of capital repayment.
“When this new definition is adopted, any product which does not comply with it will cease to be regarded as a ‘lifetime mortgage’ and will be treated as a ‘standard’ mortgage.
“This potential to structure a product that requires an element of capital repayment, but is essentially a lifetime mortgage, could neatly sidestep the rules surrounding lifetime mortgages and the current safeguards insisted on by the Equity Release Council.”
The ERC have encouraged the regulator to ensure standards the industry has abided by for many years and that are enshrined in its code, including fixed interest rates, no negative equity guarantees, a requirement for independent legal advice and the right to live in one’s home until death, are not threatened.
Ms Rozario added there were discussions about operating under a two-tier definition of a lifetime mortgage, which in turn could be fraught with confusion. “The worries are that the new definition will lead to the development of what some have termed ‘equity release lite’ products,” she added.
Ms Rozario continued: “On top of this, the advice process is unlikely to need specific adviser qualifications in the form of an equity release qualification.”
In September the Financial Conduct Authority outlined an approach for the implementation of the MCD, with a consultation paper stating compliance with the European rules will “be achieved largely through reliance on existing mortgage rules”.
Most commentary on the consultation focused on the change to second charge mortgages to bring them under the scope of consumer credit rules, and new European rules which require lenders to stress test borrowers against a 20-year high in interest rates.
peter.walker@ft.com
