To ensure that consumers can make an informed choice with these changes it is crucial they understand the differences between options such as retirement interest-only (RIO) mortgages and lifetime mortgages.
Contrary to popular belief the differences in some instances are quite subtle, like the roll-up of interest.
Many assume that as RIOs do not roll-up interest, all lifetime mortgages do.
However, many of the new serviceable lifetime mortgages now provide customers with the flexibility to pay interest as they go, before switching to roll-up at a later point if they wish.
Another key difference between the two is affordability, with RIO mortgage customers required to service the debt each month.
This means that homeowners with an RIO mortgage must have sufficient income in retirement to pay off the interest each month for life, and must be able to continue to repay if a spouse dies when the product was taken out as a joint mortgage.
This could have the potential to leave some customers in significant financial hardship, unable to service their debts in later life.
However, with lifetime mortgages the loan and the rolled-up interest is only repaid when the customer dies or moves into permanent long-term care.
If the customer was part of a couple, the repayment is not made until the last remaining person living in the home either dies or moves into permanent long-term care.
In addition, unlike equity release products, advice is not compulsory for every RIO product. It is widely recognised that good quality advice that takes into account all options has a vital role to play when making considered financial choices in later life, particularly when people’s needs and circumstances can and do change over time.
Ability to make choices
Overall, the Financial Conduct Authority’s Mortgages Market Study interim review was a positive outlook for lifetime mortgages.
The industry should be encouraged by the acknowledgement that product innovations are providing greater choice to customers.
Equally, it should also use the report as an opportunity to consider how the customer experience can be further improved.
For example, the report noted that some lifetime mortgage customers find it difficult to understand the meaning of certain terminology such as ‘enhanced’ and ‘roll-up’.
This is by no means unique to equity release, and is a challenge across many areas of financial services, but providing a fair, simple and complete explanation of equity release plans is one of our core principles.
We will continue to work with members of the council to provide information which is accessible and understandable, as well as helping to compare different products.
Longer purchase time
The report also states how the process of purchasing a lifetime mortgage tends to be longer and that equity release customers approach their purchasing decision differently to other mortgage customers.
They are more likely to spend time over their buying decisions, and will review information with friends, family and professionals in the process – something the ERC encourages.
RIOs do not require this advice channel.
This raises the concern that customers looking for a product for life will enter into agreements they may not understand the long-term implications of, simply because of a lack of communication with both family and professionals.
Promoting greater dialogue over financial decision-making creates a better-informed consumer and reduces risks in the market.
The council has and will continue to take a lead in setting high standards for later life lending products and advice, and we will ensure that this continues with the introduction of new products such as RIO mortgages.