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FCA raises alarm over ‘younger’ equity release borrowers

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  • 06/11/2018
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FCA raises alarm over ‘younger’ equity release borrowers
The increasing number of lifetime mortgage borrowers aged between 56 and 60 has been noted as an area of concern for the financial regulator.

 

Equity release borrowers in this group now represent 7% of all lifetime mortgage sales, according to Christopher Woolard, executive director of strategy and competition at the Financial Conduct Authority (FCA).

Speaking at the UK Financial Annual Mortgage Conference, he added: “While numbers are still small, around two or three thousand a year, this pattern warrants our early attention.

“After all, there’s an obvious reason why lifetime mortgages are better suited to older borrowers.”

The compound interest charged on equity release mortgages means debts get bigger each year, to roughly double every 14 years based on current interest rates.

It means a consumer who has borrowed £50,000 will end up paying £100,000.

Woolard said: “The risks, therefore, increase when a consumer takes out such a mortgage at a younger age.

“The result may be very little money left to pay for care or to pass on to children – or even the loss of equity completely.”

 

More product choice

The number of equity release products on the market has increased substantially in the past couple of years.

There were 139 product options available in August 2018, compared to 58 in 2016 and only 24 in 2007.

Woolard said the regulator is behind the development of innovative products that meet the changing needs of consumers but warned of the “trap” of unintended consequences.

He added: “We are looking to firms to use their common sense when lending, and make sure they’re matching the right products to the right consumers.

“Past experience shows that when lenders compete on loosening their criteria, it does not end well – for consumers or firms.

“When it comes to later life lending, the assessment firms make about a borrower’s ability to afford repayments over the long term could have a dramatic impact years later on their life.”

Fears for interest-only mortgage borrowers

Woolard also appeared to warn about a default mindset that equity release is the solution for interest-only borrowers who can’t repay their capital loan at the term end.

There will be two peaks of borrowers in 2027/2028 and 2032 who are expected to have a greater risk of shortfalls to pay off loans and could be more likely to lose their homes.

Lenders must speak to these borrowers early to give them more options, Woolard said.

He added: “But well before these conversations are necessary, we’re looking to you as lenders to make a rational judgement about which product is suitable for which consumer in the first place.

“The ball is in your court.”

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