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Older borrowers could end up with wrong deal after FCA retirement interest-only mortgage reclass, critics say

  • 14/06/2018
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Older borrowers could end up with wrong deal after FCA retirement interest-only mortgage reclass, critics say
Older borrowers may not end up with the right product for their needs, potentially creating mis-selling cases for the future, as the lines between equity release and mainstream mortgages become increasingly blurred, industry experts fear.


Availability and choice of later life lending is set to be boosted after the Financial Conduct Authority (FCA) recently reclassified retirement interest-only mortgages from a lifetime mortgage to a standard mortgage.

The FCA’s change means mainstream mortgage brokers can now offer advice on retirement interest-only products without having to pass specific equity release exams.

As a result, Vernon Building Society recently said it would no longer require brokers to hold the equity release qualification when advising on its retirement mortgage range.

It comes as mainstream mortgages have become more accommodating to older borrowers and increased innovation in equity release.

However, critics are worried borrowers won’t be given their full range of options or could deal with advisers without adequate levels of the knowledge of the later life market.

Stuart Wilson, managing director of the Later Life Academy, said: “This re-classification could mean a lot of mortgage brokers, who don’t have a later life and equity release experience or qualifications, thinking this is an opportunity to get involved in this sector without requiring the qualifications needed for equity release advice, or the ongoing training, or the ongoing resource commitment.

“It’s a reason why I am deeply worried by the Vernon’s decision that it won’t be requiring mortgage advisers to hold the equity release qualification in order to arrange its retirement mortgage.

“We need to be training advisers in later life lending, in its very broadest sense, rather than placing products in silos – as this decision by the FCA does with retirement interest only.

“Presently, and this decision heightens the distinction, mortgage advisers are not required to go through the same process as equity release specialists – even though the risks are the same.

“I think this is dangerous and could result in a lot of mis-selling claims further down the line if it can be proved that the product recommendation was not the most suitable for the client.”

His concerns were echoed by Nici Audhlam-Gardiner, managing director of Lifetime Mortgages at OneFamily.

She said: “It’s great to have more solutions, but it’s quite complicated in terms of which is the right product for a borrower.

“Customers are unlikely to be presented with all of their options by the same adviser – and they are unlikely to go to two different advisers for their needs.

“As we go forward, those are worries that customers may end up with the wrong solution.”

Dean Mirfin, chief product officer at Key Retirement, said a person taking out a retirement interest only mortgage could end up holding it for the rest of their lives.

He added: “We believe borrowers should be aware of all of their options.

“Taking specialist independent advice is the only way that a client can be confident that they are aware of all of their options – be it retirement interest only, another mainstream option, downsizing or equity release.

“As part of the retirement interest only advice process, brokers are required to highlight the fact that a lifetime mortgage might be more appropriate for the client, but they will not be able to provide advice unless they have the relevant qualifications.”


Holistic advice


Advisers should be able to offer all the solutions for a customer’s needs, Wilson suggested.

He said advisers should, for example, be able to recommend equity release, a retirement interest only, or potentially a traditional mortgage or second-charge depending on the situation.

Audhlam-Gardiner added: “Advisers need to be able to talk about all products or have a good referral mechanism.

“Equity in people’s homes is going to become an increasingly important part of finances in retirement and later life.”

Referrals are likely to be the solution now and in the longer term, according to Simon Chalk, equity release specialist and managing director of Later Living Now.

He said: “This shows the need for overarching holistic advice in the later life space, but there’s always a debate about how much an adviser can be expected to know in other areas.

“It’s a grey area but I don’t think we need to be worried in the short to medium term – mortgage brokers will likely end up having a relationship with equity release advisers and vice versa.

“If someone has surplus income and wants to make payments, I would refer them for advice on an interest only mortgage.

“In the long term I would expect very strong collaborative relationships between advisers – you can’t be an expert in every area.”


Pros and cons of retirement interest-only


More lenders are expected to offer retirement interest only the deals as a result of the regulator’s change.

Nationwide recently announced plans to the offer the products and Hodge also launched a new deal.

Borrowers coming to the end of interest-only terms without a means of repaying their loan are among those likely to benefit from increased access to retirement interest-only mortgages.

Under the deals, borrowers must still pass affordability tests for interest payments, but the capital loan is repaid through the sale of the property when the owner dies or moves to care.

One of the main benefits of the deals is that borrowers can typically get a higher loan to value (LTV) then they would be able to with an equity release.

Interest doesn’t roll-up on the deals and consumers are not at risk of rapid equity erosion, the regulator said when it last year consulted on changes.

Although there are also some equity release products that also allow borrowers to pay interest on the loan as they go.

Borrowers also don’t get the no negative equity guarantee that comes with equity release products.


More choice for borrowers


Industry figures have welcomed the increased choice in the later life lending market.

Dave Miller, account manager at Spicerhaart Corporate Sales said: “There is obviously a need, and I think we will see more lenders start to offer similar products as there is an ever increasing demand from consumers.

“The more lenders there are, the more competitive the market becomes which means rates will fall, and that is great news for borrowers.”

Ian Keeling from Vernon Building Society said: “The society is acutely aware of the conduct risks associated with retirement interest only and is committed to ensuring that our products are appropriate for those that take them.

“The recent review by the FCA of retirement interest only and the amended MCOB rules helped guide our recent decision to remove the requirement, as they specify that an adviser should make clients aware of the alternatives but do not have to be qualified to advise on them.

“We ensure that all introduced applicants fully understand the product’s features and risks as part of our underwriting process.

“In addition we ensure that they have all been informed of the alternative options that are available in the equity release market and if not we refer them back to their adviser.”

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