Equity Release  

Lenders told to up LTVs for interest-only mortgage prisoners

Lenders told to up LTVs for interest-only mortgage prisoners

Loan-to-values on equity release where interest and capital is wholly or partially served should be greater, according to More 2 Life's Dave Harris.

Mr Harris said greater flexibility is needed on LTVs to help interest-only mortgage customers and would allow the further evolution of early repayment charges (ERCs) to help rid the industry of some of its unsavoury legacy complaints.

LTVs reflect the risk a funder or life company offering equity release is prepared to take principally on the 'no negative equity' guarantee biting.

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The no negative equity guarantee means that the amount a borrower has to pay back is fixed, regardless of house price changes, and they will never fall into negative equity.

For many life companies the higher the LTV the more capital they also need to reserve in their Solvency II models.

The payment of interest or capital repayments can help mitigate the risk of falling into negative equity.

But Mr Harris said interest and capital payments ideally for a customer need to be optional, i.e. something they can start and stop, but this hampers life company actuarial models and therefore the current crop of equity release products are engineered to try and make everything more certain.

For More 2 Life, Mr Harris said greater flexibility to design products will be possible with non-life company funding.

Mr Harris said: "[Higher LTV products] would connect with greater consumer demand and satisfaction.

"Pension schemes, wealth managers, sovereign wealth funds and reinsurers should all look seriously at the asset returns possible and societal good that can be delivered."

Stuart Wilson, managing partner at the Later Life Academy, said in principle he agrees with Mr Harris, as the lender takes on less risk if the client pays this way, compared to a roll-up equity release.

With roll-up products equity release customers don't make any payments through the life of the mortgage. Instead, the interest and any charges, are added to the loan each month.

But Mr Wilson said a customer could make only a couple of payments then move to a roll-up option - assuming it was a product approved by the Equity Release Council - and, because the original advance was higher, the equity would then be eroded more quickly.

Mr Wilson said: "Ironically, these options are available because of the current products on offer that are not council-approved but offer higher LTV because they allow the interest to be serviced.  

"As advisers, however, we should work with our clients to show them the impact and saving of making interest or ad-hoc payments. 

"With pension freedoms there may well be access to tax-free capital at a future point and this could form a broader element of holistic planning for consumers."

Mr Harris's remarks come after the Financial Conduct Authority warning the many interest-only mortgage borrowers who have not arranged a repayment plan to speak to their lenders as soon as possible, or risk losing their homes.