MortgagesApr 29 2016

Key Retirement: Equity Release Council is choking innovation

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Key Retirement: Equity Release Council is choking innovation

The Equity Release Council’s strict standards have been accused of holding back product innovation which could open the market to tens of thousands of potential consumers.

Dean Mirfin, technical director at Key Retirement, praised the ERC’s work to improve the industry’s reputation over the last 25 years, but said the products allowed under the current strict rules are disenfranchising some interest-only borrowers.

He revealed Key Retirement Group’s lender More2Life has designed a hybrid product to meet this group’s need for higher loan-to-value lending while protecting the potential negative equity risk.

The product, for which More2Life is seeking potential funders, has an initial advance on a traditional roll-up basis - where interest is added or ‘rolled-up’ on the original loan - and a top-up advance providing the uplift to achieve the higher LTV.

But Mr Mirfin said it would fail the ERC’s no negative equity guarantee requirements. He suggested some borrowers would be willing to accept this type of loan as a solution, where they understood the risk, on the basis the alternative is losing their home today.

“With the top-up layer providing a further 10 to 15 per cent LTV to a 65 year-old, we could help a further 30 to 35 per cent of interest-only maturities with no repayment method,” said Mr Mirfin.

He admitted the lender would need a “very robust” affordability assessment for the top-up element, but stated internal analysis showed the amount of the top-up loan on average would be around £30,000 - which on a 5 per cent a month basis could decrease default risk.

Mr Mirfin also questioned the ERC’s guarantee of security of tenure for life - which would also not be available with the proposed product - because under this loan structure default on the top-up element would lead to repossession.

“This may be a risk a borrower can take, after all they have accepted it for at least the past 25 years on the mortgage which is about to mature.”

Nigel Waterson, chairman of the Equity Release Council, responded the industry standards have been vital to establishing consumer confidence, adding “any innovation should not come at the expense of consumer protection or long-term sustainability”.

“With the protections - such as the NNEG - currently in place, equity release products are ‘future-proofed’ against market developments and changing circumstances ensuring high levels of customer satisfaction.”

Mr Mirfin argued the NNEG - which provides borrowers with surety mortgage debt can never be more than the eventual sale value of the home - means increasing LTVs for roll-up lending just does not work.

To solve the problem, he suggested focusing on those borrowers with higher LTV interest-only mortgages that are about to mature, but for which they have no repayment method.

“Our analysis shows that approximately 40 to 50 per cent of interest-only customers can be helped through existing equity release solutions, maintaining the council’s standards, but tens of thousands of borrowers do not provide sufficient LTV.”

More2Life’s channel marketing director Stuart Wilson confirmed it is a product they would support, adding that demand will only increase as more and more interest-only mortgages come to maturity, with many belonging to people who have either retired or are semi-retired.

“The product concept outlined would help solve interest-only repayment issues for those requiring LTVs at higher levels than normally available through conventional interest served plans,” he added.

Andrea Rozario, chief corporate officer at Bower Retirement Services and former ERC director general, said the solution is a number of products with a variety of safeguards fitting various needs.

“The NNEG can still be available for those who need it or insist on it, but right now it is the industry insisting on it, and with past history, for good reason, but is this still the right thing when there are so many customers facing interest-only issues?”

Earlier this month, the Financial Conduct Authority allowed equity release lenders to apply for a rule waiver on interest-only mortgages, allowing them to “switch off” affordability assessment for borrowers offering interest-charging lifetime mortgages that can convert to roll-up mortgages.

Earlier this month, the Council of Mortgage Lenders also warned more must be done to assist advisers in offering clients a range of at-retirement options that includes lifetime mortgages.

In its response to the FCA’s discussion paper on the ageing population and financial services, the CML argued current rules may unintentionally create barriers to product development, therefore recommending closer co-ordination between regulators to look at possible liberalisation.