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FCA redefines retirement interest-only loans to standard mortgage regulation

  • 23/03/2018
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FCA redefines retirement interest-only loans to standard mortgage regulation
The Financial Conduct Authority (FCA) will treat retirement interest-only mortgages as standard mortgages, instead of being regulated under equity release rules in an effort to broaden product choice in the later-life lending sector.


Previously, the regulator deemed in the Mortgage Credit Directive (MCD) that retirement interest-only mortgages belonged to the same ‘lifetime mortgages’ category as equity release.

This means that sales of retirement interest-only products will not be subject to MCD rules, and will not require advice.

However, the FCA added that: “In practice, most retirement interest-only mortgages will be sold with advice as our standard mortgage rules require this. For example, advice is required if the sale is interactive or the mortgage is used to consolidate debt.”

The financial watchdog said it sees retirement interest-only borrowing as a way to help older consumers with reliable retirement incomes access finance, including those with insufficient funds to fully repay maturing interest-only mortgages.

The regulator also made its intention to give the sector a boost by making it a clear alternative to other later-life finance options.

“We envisage retirement interest-only mortgages as an additional option alongside downsizing or equity release, not just as a solution for customers with maturing interest-only mortgages,” the FCA said in its Handbook notice.


No advice necessary

Retirement interest-only mortgages allow borrowers to only pay monthly interest, where the lender will not seek repayment until a specified life event – usually at the death of the borrower or as they move into residential care.

At that point, the loan is repaid through the sale of the property.

However, industry feedback on the Handbook change showed concern that the change will allow execution-only sales in some circumstances.

Respondents, including equity release firms, argued that advice should be compulsory as it is under equity release rules.

The key reasons mentioned were that advice would ensure customers are aware about products across both equity release and standard mortgage markets, and to inform older, vulnerable consumers that they could face repossession should they fail to keep up payments.

The FCA responded that advice was not necessary, as it “will not mitigate the chief risks identified by respondents and, indeed, we already have a number of mitigants in place.

“For example, the risk of repossession is mitigated by our responsible lending rules and our rules on how to treat customers in payment difficulty.”

Jackie Bennett, director of Mortgages at UK Finance added: “Despite advice not being required in every case, we expect most people to receive it.

“It’s useful that the FCA has clarified what information will need to be disclosed to customers so that they are fully informed, and provided further details on how lenders will need to carry out an affordability assessment.

“The FCA’s reclassification will offer homeowners in later life an alternative option, alongside equity release for those customers who wish to stay in their homes.”


For further information, please visit the FCA Handbook notice here.

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