The recent announcement by the FCA that it is to lift the requirement for affordability checks on so-called ‘hybrid’ plans that allow for interest to be served is very welcome, and timely.
Stuart Wilson is marketing director at more 2 life
The FCA announcement is a welcome – and timely – change of policy that could open up new opportunities for advisers and their clients.
After lengthy consideration and some not inconsiderable lobbying by many within the equity release industry, the FCA announced that it is to remove the requirement to carry out affordability assessment for hybrid lifetime mortgages that offer the ability to make interest repayments.
‘Interest served’ lifetime mortgages have been around for some time and are popular with a typically younger clientele who have reached the end of their interest-only residential mortgage with little or no savings put by to repay their mortgage debt.
Faced with narrowing lending and remortgage options in the traditional market, interest served lifetime mortgages offered a lifeline for older, retired borrowers who were more than capable – and willing – to maintain some or even all of their interest repayments. And with the option to convert to a full roll-up plan at any time in the future once the interest repayments became too much, the advantages were clear. A ‘win-win’ if you like: mortgage debt repaid and no more worries about the house being repossessed.
But there was a problem – or rather, an ‘unintended consequence’ introduced by the Mortgage Market Review (MMR) regulations in 2014. If a client wanted to repay interest, even just a very small amount each month (some plans offer minimum payments of just £25 per month) they would have to be subject to the same affordability assessment as a client applying for a residential mortgage, introduced under MMR.
Designed to combat some of the irresponsible mortgage lending issues that led to the ‘credit crunch’, the affordability assessment became a clunky and (in the eyes of many in the equity release market) wholly unnecessary piece of ‘red tape’, and the sales of interest served products suffered as a result.
The protests started immediately, with providers and advisers pointing out that interest payments were being made voluntarily, they could be stopped at any time and there is never any danger that a client’s home can be repossessed even if and when they choose to stop paying interest. So why on earth should a client have to ‘prove’ they can afford repayments that they can stop, without penalty, whenever they want to?
Now, the financial services market is nothing if not inventive and some providers began introducing clever ways to ‘beat the system’ with the introduction of ‘flexible repayment options’ – these allow clients to repay up to 10% of the initial loan each year without penalties such as ERCs and, crucially, these payments do not trigger the need for an affordability assessment.
Innovation like this is fantastic, of course, because it opens up new options and more flexibility to clients. But for clients who want to truly serve interest on their loan and not just repay some capital (as the flexible repayment options do) then this solution is not wholly suitable.
So, the recent announcement by the FCA that it is to lift the requirement for affordability checks on so-called ‘hybrid’ plans that allow for interest to be served is very welcome, and timely.
There are around 2.8 million people in the UK with interest-only mortgages worth an estimated £363 billion. The vast majority of these mortgages will mature over the next 15 years or so and many borrowers will be approaching or already ‘in’ retirement by the time their loans fall due to be repaid.
In fact, around 40,000 interest-only mortgages maturing annually between 2017-2032 belong to borrowers who will be aged 65+, a total maturing book of loans worth something like £3bn per year and rising to a peak in the early 2030s.
It’s worth pausing there for a second – the annual market potential for interest served lifetime mortgage solutions, on its own, is worth almost double the entire volume of equity release sales in 2015, and rising.
Indeed, the three ‘waves’ of interest-only mortgage maturities (2016 – 2020, 2021 – 2027 and 2028 – 2032) added together are arguably one of the key future drivers of growth in the equity release market. This represents tens of billions of pounds of potential sales and the removal of the affordability assessment shackles is a major step forward to helping advisers capitalise on this opportunity.
We fully expect to see a resurgence in sales volumes once the relevant permissions have been sought and granted by the FCA and future product innovation in this market is inevitable now as providers seek to offer more options to a client group in desperate and urgent need of a suitable retirement lending solution.
