Financial Conduct Authority  

Regulator urged to step in on intergenerational mortgages

Regulator urged to step in on intergenerational mortgages

The Financial Conduct Authority should ensure the market can help young people get on the housing ladder, according to a House of Lords committee.

The House of Lords committee on intergenerational fairness and provision said younger generations needed more support from older generations to afford property than ever before and urged the watchdog to ensure the market allowed for innovation.

It said: "There is a need for innovative, flexible products which can help address the issue. The government and FCA have a key role to play in ensuring a regulatory framework that encourages new challenger entrants to these markets, who can shake up the existing playing field."

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Quoting research from Douglas McWilliams, the report says 27 per cent of all housing purchases in the UK were made with contributions from older family members, with gifted lump sums averaging between £5,000 and £6,000.

On top of this, 60 per cent of first-time buyers expected to need some help from family members to get on the first rung of the ladder.

Older homeowners looking to help their children or grandchildren often looked towards equity release, retirement interest-only mortgages or an intergenerational mortgage to release cash for a deposit.

Equity release — releasing equity from the owned property with no repayment required until the property has been sold — has seen a surge in recent years, with £3.94bn of property wealth unlocked in 2018, up almost a third year-on-year.

Meanwhile Rios, which were facilitated by a rule change by the FCA last year and allow borrowers to free up equity in their house with monthly interest payments, have been less popular.

An intergenerational mortgage is where a deposit is replaced or combined with a charge against a relative’s home or savings. The new buyer can get 100 per cent LTV on the property if a relative deposits 10 per cent of the value of the new home as collateral.

The report urged the FCA to make guarantor and intergenerational mortgages easier and more appealing for the "middle section of the population who may have housing wealth, but only a modest amount of financial wealth". 

Nigel Keohane, the Social Market Foundation’s director of research, said this target group could be helped by a guarantor mortgage to use their own property as collateral for younger generations.

Commenting on the report’s findings, Dean Mason, director at Masons Financial Planning, agreed the FCA should discuss how to make guarantor mortgages easier.

He said: “The reality of middle aged or older parents, and even grandparents, helping their offspring on to the housing ladder is very common. 

“They may often need to raise the monies via re-mortgaging their house, which is often complicated if they are older and leads them towards the quite expensive route of Rio or equity release. 

“Guarantor mortgages used to be the solution but lenders are very uncomfortable with these post-MMR. Intergenerational housing has been a fixture of the housing market in many other developed countries for decades now and the FCA and lenders should discuss how they can make this easier and create a nation of homeowners once more.”