The Financial Conduct Authority has allowed equity release lenders to apply for a rule waiver to allow them to “switch off” affordability assessment for borrowers offering interest-charging lifetime mortgages that can convert to roll-up mortgages.
A statement on the regulator’s website explained the modification has been made because it does not consider that an affordability assessment is required where there is no risk of arrears and repossession in the event of missed payments.
It also makes changes to product disclosure rules and the prescribed text of the key facts illustration, so the KFI gives a meaningful description of features and risks both when interest payments are being made and when they are rolled up.
The modification works by not applying the requirement to carry out an affordability assessment where interest payments are anticipated or required, providing the specific lifetime mortgage allows the consumer to exercise at any time an option to convert the product to interest roll-up.
To ensure the consumer understands how the product operates, and the impacts both of making payments and choosing to convert to interest roll-up, some tailoring of the disclosure document will be necessary, noted the FCA.
“The intention is to consult in due course on the appropriate amendments of the MCOB [Mortgage Conduct of Business] rules for these products. These may differ in form from this modification, or may not be made at all.
“In the meantime, the modification will be available for one year, or until any amendment is made to the rules, whichever is earlier.”
The Council of Mortgage Lenders (CML) welcomed the change, stating it addresses one of the aspects it called for in its retirement borrowing report, published in December 2015.
Paul Smee, director general of the CML, said: “This may look like a small change, but it is a really significant one that should allow the lifetime mortgage market to develop in a far more sensible and consumer-friendly way.
“It removes one barrier to the provision of sensible, safe and worthwhile lifetime mortgage products.”
Nigel Waterson, chairman of the Equity Release Council, was also pleased at the move, suggesting it has the potential to help more consumers make use of options already offered by equity release providers in later life and encourage further innovation within the market.
“We have been lobbying on the issue of affordability for lifetime mortgages for some time, as part of our response to the FCA’s call for inputs at the end of 2015, so I am pleased that they have listened fully to our concerns.
“The optional payment of interest within a lifetime mortgage is different to that of a residential mortgage with the opportunity for consumers to switch to roll-up when they wish.”
Adviser view:
Oliver Marley, a research assistant at brokers Independent James, called allowing lenders to bypass affordability rules in certain instances “a smart move” as it provides customers the freedom to support interest payments rather than accumulating on the mortgage balance.
“Ordinarily, the customer would be penalised and forced to attract interest on a rolling basis, but this allows certain clients to keep the mortgage as low as possible.”
At the start of this month, the Prudential Regulation Authority began a consultation on the equity release lending sector, shining its spotlight on lifetime mortgage valuations, capital treatment and risk management.
peter.walker@ft.com
