With the FCA confirming that the Final Report on its Mortgages Market Study will be published during Q1 next year, it’s perhaps not surprising that the regulator already appears to be laying the groundwork for some of the measures it might announce.
In that sense, it was interesting to learn the FCA is looking closely at the later life market, in particular, questioning whether an increase in sales of lifetime mortgages to those in the 56-60 age group is cause for concern.
The FCA’s Executive Director of Strategy & Competition, Christopher Woolard, at the recent UK Finance conference said that 7% of all lifetime sales are now made to this age group, which is a fairly significant increase.
Given the fact that compound interest is added to the lifetime mortgage loan and this age group might well live for a number of years with the loan, this could clearly wipe out the entire value of the house by the time the loan is redeemed.
Although, it has to be said that with these products’ no negative equity guarantee there is no chance that the borrower/family will have to pay back more than the value of the home.
However, given the FCA has ‘gone public’ on this, we can perhaps see its logic around the regulation of Retirement Interest-Only (RIO) products – placing these within the same framework as mainstream mortgages and (as long as lenders allow) ensuring that those without equity release qualifications can provide advice on them.
Of course, a large number of lenders who offer RIOs don’t allow advisers without their equity release qualification/authorisation to ‘sell’ RIOs but, under the regulations, that’s a compliance check put in place by the lenders and won’t necessarily be the case for all.
One wonders however if the regulator doesn’t believe that a RIO product might be more suitable to the ‘younger’ age group, and in some ways this focus on lifetime mortgages could be perceived as a ‘RIO charter’, especially if the Final Report ups the minimum age limit for lifetime mortgages.
Many in the market have already suggested RIOs are a ‘cascade’ product whereby borrowers, for example, coming off mainstream interest-only mortgages might be suitable for RIOs, and then perhaps further down the line become suitable for a lifetime mortgage. This would – on the face of it – appear to chime with the regulator’s thinking.
What, of course, advisers have to be wary of is making recommendations purely on the age of the borrower. Being ‘younger’ doesn’t necessarily mean that the lifetime mortgage isn’t suitable, especially if they have no means (or inclination) to continue paying the interest on their loan. Conversely, an older borrower might well be favoured by a RIO, if they want to continue paying the interest.
What happens next is anyone’s guess but if the regulator does feel that younger borrowers are ill-served by lifetime products, then we should perhaps expect further regulatory change in this area come next Spring.
Richard Adams is Managing Director of Stonebridge Group