Today (8 February) the Equity Release Council has asked the Financial Conduct Authority to consider whether a relaxation of mortgage affordability rules could help more lifetime mortgage customers take up the option to make interest repayments initially before switching to a roll-up arrangement.
Following the Mortgage Market Review, amendments were made to the Mortgage Conduct of Business rules which mean 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.
According to the Equity Release Council this is despite the fact that payments of interest are always optional and customers will never be at risk of losing their home as a result of being unable to continue with interest payments.
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 assessment and as such, may be reluctant to subject themselves to the assessment process or be recommended alternative products, the council warned.
The ERC 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.
According to the council a relaxation might also support existing providers’ ability to expand their product range and encourage new entrants.
This request formed part of the ERC’s evidence submission to the FCA’s Call for Inputs on competition in the mortgage market and the FCA is set to outline next steps in the form of a summary statement in the first quarter of 2016.
The ERC’s submission included a separate request for the FCA and government to consider the long-term impacts of decisions relating to tax and regulation which may affect equity release lending.
Additionally, it 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, said: “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.”
Dean Mirfin, technical director at Key Retirement said: “With the introduction through MMR of tighter affordability requirements interest served lifetime mortgages have been hard hit by the change with the number of new loans falling considerably.
“These loans convert to roll-up in the event of default, be that voluntary or otherwise. Many consumers want this type of loan for this very purpose, yet affordability requirements mean that many simply do not qualify to support the interest payments over the longer term, the very reason that this type of loan was created.
“There is a clear rationale for the regulator to review its approach with this type of loan as the current regulation is potentially forcing consumers to enter roll-up loans from outset, thus increasing their overall cost of borrowing, when they specifically want to service the loan for a period of time to reduce the overall cost.”
ruth.gillbe@ft.com
