Equity release customers taking out a Lifetime Mortgage can choose not to make a monthly payment, rolling-up the interest onto their mortgage balance instead. The loan will be repaid from the sale of the property negating the requirement for an income and outgoings check to be made.
But some providers, which offer borrowers the choice to make monthly interest payments to reduce the impact on their equity, are subjecting clients to an MMR-affordability test, even though the payment is not compulsory.
Speaking at the British Mortgage and Protection Senate at Brooklands in Surrey, Chalk (pictured) said providers More 2 Life and Stonehaven, which give customers this choice, are being forced to assess affordability and stress-test payments under certain plans.
“It should not be captured by the MMR because if the client later finds the monthly interest payment becomes difficult for any reason, or should they simply change their mind at any time, they can switch to a full roll-up of interest,” said Chalk.
“Therefore we have a loan that will never fall into arrears, hence there is no risk of default or repossession, the very risk that MMR was designed to mitigate simply doesn’t apply to the equity release market.”
Stuart Wilson, marketing director at More 2 Life, said: “We believe that the lifetime mortgage market has been caught by the ‘law of unintended consequences’ as a result of the MMR. This additional level of compliance is, in our view, unnecessary given the high level of regulation that already applies to this product sector.
“This is very different from a residential mortgage – the primary focus of MMR – which can be bought on the high street without any form of financial or legal advice.”
Alice Watson, product and communications manager, for Stonehaven does not agree that the need to assess affordability is an unintended consequence.
“Lifetime mortgages always offer customers certain safeguards, including the ability to stop making interest payments and convert interest paying loans to interest roll-up.
“However, we think it is right to assess the customer’s ability to make interest payments, because while our monthly interest payments are voluntary, if the borrower misses more than three payments we would convert them to an interest roll-up product.”
Because the impact of an interest roll-up on the mortgage is not illustrated to the customer at the outset, Watson said Stonehaven would rather make sure the interest payments they have elected to make are affordable.
Chalk said before the MMR, equity release advisers would help clients determine if regular interest payments were affordable by establishing a sensible budget to be paid each month. Any interest which was not affordable would be rolled-up into the mortgage.
Chalk argued that with some providers now taking over this responsibility it meant the adviser and the client did not know, at the point of advice, exactly how much could be borrowed.
“It’s a strange place for an equity release adviser to be,” said Chalk.
“They should be allowed to advise their client on the appropriate amount to withdraw from their home based on the standard loan-to-values set by the age of the youngest borrower.”
Chalk and Miller are both calling for the Financial Conduct Authority (FCA) to make all current Lifetime Mortgage products exempt from the MMR rules because those which allow monthly contributions do so on a voluntary basis.
“The FCA’s imposition of MMR rules is nonsensical when you also consider that an equity release customer could opt for a rolled-up interest plan from Aviva or Hodge with optional capital repayments up to 10% per annum with no affordability test.”
A spokeswoman for the FCA said: “We continue to monitor how the MMR is bedding in and certain rules are working as we expect.”
