Equity Release 

Lifetime mortgages: Opening the door to innovative lending

Lifetime mortgages: Opening the door to innovative lending

The recent move by the Financial Conduct Authority to relax the rules surrounding lifetime lending have been very much welcomed by the industry. The lifetime mortgages sector had previously been a restricted market with a slowdown in innovative products coming through, a lack of entrants, and a shortage of advisers.

The latest move by the FCA is in response to market confirmation that it has, up until now, restricted development and take-up in the sector. As a result, the FCA’s willingness to relax its rules has been seen by many as positive news for the industry, since lenders, advisers and consumers could all potentially benefit from the introduction of new products that cater for consumers' growing needs. 

The arrival of MMR regulations in 2014 introduced affordability assessments, which require lenders to carry out affordability checks whenever interest payments are anticipated. With traditional interest roll-up plans, the interest owed gets added to the value of the loan and is only repayable when the property is sold.

Many working within the industry said its introduction did not make sense given that this type of product allows them to choose how long to continue making interest payments with no danger of having their property repossessed if they can no longer afford them – they simply convert their plan at that stage to a standard roll-up.

However, following an announcement earlier this year that it would grant lenders a waiver to this requirement, the FCA has now confirmed it is planning to scrap the requirement to carry out an affordability assessment altogether, where interest payments are anticipated or required. This would only be available to firms where the specific lifetime mortgage allows the consumer to exercise, at any time, an option to convert the product to interest roll-up.

The affordability conundrum has been restricting entrants to this market because lifetime mortgage lenders typically only offer interest roll-up loans, and the cost of putting systems in place to check affordability has not been particularly alluring for new lenders. This has also had a knock-on effect on product innovation and has slowed the number of products coming to market. 

By altering the rules on lifetime lending, the FCA has opened the door for lenders to be more innovative without compromising standards. There is now a golden opportunity for key stakeholders, including the Equity Release Council (ERC), FCA and the Council of Mortgage Lenders (CML), to galvanise behind a concerted effort to move the lifetime market on and rapidly grow it, improving customer outcomes and offering more retirement lending options. 

The FCA is also proposing to make changes to its rules on how firms should calculate the length of the term in the key facts illustration (KFI) documents provided when an equity release product is chosen or recommended. These changes include how repayment information will be presented in the KFI where payments are expected at the point the product is sold, but may be rolled up in the future. 

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