FCA to shake-up interest-only mortgage rules

FCA to shake-up interest-only mortgage rules

The Building Societies Association (BSA) has welcomed a proposed regulatory shake-up that could widen the availability of retirement interest-only mortgages.

The Financial Conduct Authority is consulting on the removal of a regulatory barrier to allow ‘retirement interest-only mortgages’ for older consumers, in which the loan would only be repaid on a specified life event such as the customer’s death or move into residential care.

Customers would have to be able to afford the ongoing interest payments, but ultimately the loan would be repaid through the sale of the property.

The regulator stated its previous decision to define such loans as ‘lifetime mortgages’ may have restricted consumer access to the products because firms may have been reluctant to alter standard lending procedures.

Charlie Blagbrough, policy officer at the BSA, said: "This proposal to take retirement interest-only mortgages out of the lifetime mortgage definition is a welcome move from the FCA.

"It recognises that these mortgages are substantially different from lifetime mortgages as they do not lead to housing equity being eroded.

"For some customers, sale of the property on death or moving into residential care may well be an appropriate capital repayment vehicle.

"If they have sufficient retirement income to meet affordability from a pension, rental properties or other sources to service the interest on the mortgage rather than rolling it up, then this product offers a great solution. 

"Currently a couple of building societies offer these mortgages. If this change leads to more such products on the market, providing consumers with greater choice in their retirement years, then that can only be a good thing. 

“Our report ‘Lengthening the Ladder’ earlier this year projected that mortgage borrowing into and in retirement will reach £40bn by 2030. Lenders need to be prepared for this shift.”

The FCA said the proposed change could be made to meet the needs of older consumers with maturing interest-only mortgages and no repayment vehicle, and those seeking to release equity from their homes without the cost of interest roll-up.

It has also proposed altering disclosure requirements to account for the extra risks associated with retirement interest-only mortgages.

Responses to the FCA’s proposals should be submitted by 1 November.

There are predicted to be around 40,000 interest-only mortgages reaching maturity each year between 2017 and 2032.

Dean Mirfin, technical director at Key Retirement, estimated that 10,000 of these had either a shortfall or no way of paying the mortgage off.