But to comply with the European directive the Financial Conduct Authority (FCA) must broaden the definition of a lifetime mortgage.
The consultation proposes to remove any link with the age of the target market for the product to remove ‘beyond doubt’ that any equity release loan requiring regular repayments of capital is not a lifetime mortgage.
This has thrown into question the classifcation of the newly developed ‘hybrid mortgage’ which is a lifetime mortgage which allows borrowers to make some form of payment, a point the regulator is discussing with the Equity Release Council (ERC).
Mortgage Solutions asked equity release experts Geoff Charles, chief executive of Bower Equity Release, and Simon Chalk, technical manager, equity release, Age Partnership, to dissect the small print and share their views on the impact of this decision.
Geoff Charles is chief executive of Bower Equity Release
It is going to be really important to consider the implications of this definition should it exclude hybrid mortgages from being classified as lifetime mortgages, as appears to be the case.
Hybrid mortgages, which allow capital repayments but can switch to roll-up, are currently defined as lifetime mortgages as they have no specific term, in common with all equity release lifetime mortgages.
However excluding hybrids from being lifetime mortgages would mean that advisers with no equity release qualifications could advise on such products and they would not come under the SHIP standards.
While it would be good that more options would be open to a wider audience, with a greater number of advisers providing increased distribution plus the likelihood that more providers would enter the market, we would advise extreme caution with the advice process. Ultimately you would likely still be dealing with older people wanting to release equity yet putting themselves in a position to need to continuously service the loan, and what would happen if that was no longer possible?
Repossessions of older homeowners would absolutely not be good for this market or for financial services across the board, let alone the customer. We think serious consideration is needed regarding assessment of eligibility and the advice process.
We are pleased to note that the FCA is in discussions with the ERC and that there is a consultation process in place, we will raise our concerns via both channels.
Simon Chalk is equity release technical manager at Age Partnership
The proposed change in the regulatory definition of a lifetime mortgage will bring the FCA’s understanding of the market closer in line with what we understand equity release to be. I urge all equity release stakeholders to respond to the consultation paper, either directly or via the ERC as we must shape our own future market.
It’s worth noting that existing providers, through their membership of the Equity Release Council, will still offer even greater levels of safeguards for customers that aren’t mentioned in the consultation paper. We are reaching almost a quarter of a century of offering crucial guarantees that far exceed the protections eluded to in this document. These include a ‘no-negative equity guarantee’, portability to another acceptable property and independent legal advice.
Many will contest that it is largely thanks to such high levels of protection that the equity release sector has steadily rebuilt its reputation, whilst acknowledging that we must always keep a vigilant watch as customer needs evolve and new hybrid products emerge.
However, I believe that we are only scratching the surface and that the true potential for equity release will only be realised if we open our minds to new, innovative products appealing to a much wider audience.
This initiative could prove to be the catalyst that propels equity release into the mainstream. New entrants may develop increasingly flexible plans that meet the new regulatory definition, without extending the core guarantees afforded by the ERC membership.
Accommodating broader variations on a theme will be a challenge for the equity release sector and it will require a rethink of exactly what it is we are offering customers, but it has never been shy of innovation in this space. We must surely welcome any directive that results in even greater number of customers being able to enjoy their hard-earned property wealth.
