The FCA in its discussion paper said mortgage products for older borrowers, like lifetime mortgages and retirement interest-only (RIO) deals, are becoming “increasingly mainstream”.
It added that the average age of first-time buyers was rising, along with the average term length, and if “more opportunities for responsible risk-taking” were created, this “trend could accelerate”.
The regulator noted that savings alone would also be unlikely to meet the cost of retirement for some people.
“Any problems in the later life lending market are likely to get worse if not tackled now. And if we fail to capitalise on opportunities for responsible innovation, we risk the market being unable to cope with the needs of future generations of mortgage borrowers,” it noted.
The FCA said its rules “may need to change to enable more holistic advice” and there were “specific challenges” that the later life sector needed to address.
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Issues facing later life lending sector
The regulator outlined some of the issues that the sector was facing. This includes borrowers with longer terms paying off capital more slowly, so their equity could be lower if they need to sell their home.
This could cause “significant problems” for a future house purchase if the equity is eroded through arrears or house prices take a turn, and they could have fewer options for equity release.
If deals are issued at the “maximum duration lenders are comfortable with”, then borrowers “will have less flexibility to extend terms” due to a “future interest rate increase or income shock, or to move to a more expensive property by extending their term”.
The FCA added that the growth of defined contribution pensions, and low contribution rates, could “risk leaving large numbers of people unable to afford essential living costs”, even if mortgages are paid off and homes are owned outright.
The regular also pointed to life events limiting their ability to earn, later life lending products tending to be more expensive, a lack of awareness of the full range of deals and products being used for purposes other than retirement.
FCA says it doesn’t want rules to create barriers to later life innovation
The FCA said the mortgage industry was focusing on later life lending as an “area of growth in an otherwise flat market”, so firms will be looking to innovate.
“We want to help ensure our rules are not creating a barrier to innovation, and that firms feel confident when launching new offerings. These offerings could be targeted at either older or long-term borrowers.
“For example, equity release products that allow borrowers to draw down on a monthly basis, rather than in a lump sum, could be a cost-effective option for those who don’t have a reliable income in retirement. Meanwhile, low-start mortgages could enable potential long-term borrowers to reduce their initial payments without some of the risks of an extended term,” it said.
The regulator said neither of these products is widely available currently, which could be due to low consumer demand, but called for more input as to whether its rules were a “barrier to supply”.
The FCA said it knew that certain aspects of the handbook were barriers to later life products.
An example is that firms should “consider the ability of a single borrower to continue making the required payments if the other dies when assessing affordability for a RIO mortgage”.
It said some firms have “interpreted this in a way [that] potentially unduly restricts RIO lending”.
