Following temporary implementation in April, the FCA are looking to permanently remove the requirement to undertake affordability assessments for hybrid equity release products.
The regulator admitted that responsible lending rules may have been preventing the development of hybrid products, which permit consumers to make regular repayments (paying all or part of the accrued interest) up to a certain point, and then allow remaining interest to be rolled up.
Responsible lending rules obliging lenders to carry out affordability assessments on borrowers are not deemed necessary with hybrid products. Consequently, lenders no longer have to bear the respective costs and the FCA believes the resultant savings will contribute towards the development of innovative lifetime mortgage products.
They also do not anticipate any significant increases in firms’ costs due to any subsequent changes to disclosure requirements, because the obligation remains the same – information should be clear, fair and not misleading.
The latest market report by the Equity Release Council shows that the second half of 2015 saw the highest amount of lending in this area than at any time after financial crisis. Even mainstream lenders, not traditionally known for this type of lending, are entering the market. Clearly they see the potential for growth.
A sizeable proportion of today’s mortgage holders are ‘asset rich/cash poor’. Should such lending become more commonplace, it could provide a much-needed potential solution to issues such as the ‘ticking time bomb’ of interest-only mortgages and the general lack of retirement provision among the baby boomer generation.
Worryingly, recent research conducted by Citizens Advice Bureau found that nearly one million homeowners did not have a strategy for repaying their interest-only borrowing at the end of their mortgage term. Are hybrid lifetime mortgages the solution; providing them with the means to repay their borrowing while remaining in their home, and at a lower cost than traditional equity release?
Any increase in later life borrowing will also boost the UK economy. In recent months, several major lenders have extended their maximum age to accommodate the borrowing needs of Britain’s ageing population. In tandem, underwriters have taken a more level-headed approach to income levels.
Despite the FCA’s understandable desire to apply caution in describing these potential changes as minor, we regard them as a major step forward in attempting to tackle what is becoming the major issue of a rapidly-increasing number of consumers who wish to borrow into later life.
This represents a significant development for consumers, as the unintended consequences of the responsible lending rules have done them more harm than good in their quest for an optimal mortgage solution.
This is a great opportunity for advisers too. But is there is a risk that the profession will not be able to satisfy the demand?
There are only a small number of advisers who are equipped to handle this kind of lending. And an occasional FCA paper has already highlighted the fact that mortgage advice on its own could be inadequate for borrowing in retirement.
To bridge this shortfall, the Society of Mortgage Professionals recommends that brokers should diversify their skill set. Their CII parent already offer an appropriate qualification in equity release. Relevant knowledge can also be gained from a level four mortgage qualification.
In the meantime, we are fully supportive of the FCA’s apparent intentions. The changing demographic of the UK mortgage market is only moving in one direction – and that is upwards, in parallel with the ever-extending curve of life expectancy.
A complementary solution is becoming a matter of urgency. The regulator recognises this, and the sooner we can establish the ground rules for advisers, to equip them to provide the best possible solution for consumers, the better.
