The Financial Conduct Authority is launching a market study into lifetime and retirement interest-only mortgages, amid an anticipated rise in the use of equity release.
Older homeowners “may increasingly have to use their housing wealth to achieve financial security and comfort in later life”, the regulator says, and that lifetime and RIO mortgages could play a larger role.
Citing government analysis that found two in five people (43 per cent) are under-saving for retirement, the FCA says it wants to understand if the later-life mortgages market “can and will develop to meet the increased and differing needs of consumers in the future”.
So, what changes could be coming for equity release?
“I would like to see the regulator be brave in taking steps to break down advice silos,” says Will Hale, chief executive of Key Advice.
“Equity release should not occupy a separate part of the rule book, and all mortgage advisers should be able to advise on the products.
“Modern lifetime mortgages are not complex, and moving later-life lending from niche to norm requires opening up distribution.
“All wealth advisers, IFAs and targeted support models also need to include the home within their planning processes, and be able to refer to specialists if they choose to leave products such as lifetime mortgages outside their scope of advice.”
‘The entire solution is being overlooked’
Jim Boyd, chief executive of the Equity Release Council, a trade body, claims many homeowners are not aware of the possibility of using property to support their retirement.
“They don’t see it as a mainstream option,” he says. “Currently, property isn’t included in the broader retirement discussion . . . the entire solution is being overlooked.”
A Canada Life survey of homeowners aged 40-plus who had spoken to a financial adviser about retirement found less than one in 10 (7 per cent) were presented with equity release as an “unprompted” option.
Peter Maddern, managing director of retirement at Canada Life, also says he believes this is largely due to the “fragmented regulatory framework for financial advice, which focuses on product silos rather than the needs of the customer”.
“In practice, this means that customers who may be suitable for later-life lending may never have the opportunity to consider it,” he adds.
“If later-life lending is to meet the evolving needs of retirees, then the regulatory framework must also evolve, enabling advisers to offer more holistic advice that is centred on the customer’s individual circumstances and incorporates later-life lending where appropriate.
“This should include looking in detail at the structure of adviser qualifications, such as requiring all mortgage brokers to achieve a qualification in later-life lending.”
David Forsdyke, head of later-life finance at Knight Frank Finance, a mortgage broker, says advisers are often “too blinkered” in their chosen field of advice, and not aware of all the options available to older homeowners.
“Some have an outdated view of equity release, while others are not fully aware of how much it has evolved in recent years and how flexible it has become,” he adds.
“The range of later-life lending solutions is growing at pace, and advisers need to keep up in order to serve consumers correctly.”
Hale at Key also says the market has seen a “significant amount” of product innovation in recent years. “Lifetime mortgages now allow interest to be served in full or in part, as well as ad hoc capital repayments to be made.
“Furthermore, lifetime mortgages no longer have to be a mortgage for life with fixed early repayment charges — on some products [there are] no early repayment charges at all — meaning that loans can be repaid if circumstances change, or remortgage opportunities [open up] if rates come down.”
A new type of equity release?
Besides the potential role of more holistic advice, the FCA says it may consider whether new products, including those similar to lifetime and RIO mortgages but outside its current definitions, could develop to meet changing needs.
For clients that need to top-up income, Forsdyke says that borrowers need a product that pays a “steady amount” each month. “At the moment this does not exist, and clients have to proactively request funds from a drawdown facility when they need funds.”
Hale meanwhile does not believe that products are a barrier, but says: “Higher loan-to-value options, and more flexible underwriting criteria allowing more properties to be eligible, would increase the number of customers that advisers could serve.
“Also, particularly in the current rate environment, variable rate products which offer advisers and customers more remortgage opportunities in the future could benefit take-up.”
Normalising later-life lending
Noting “very little successful entry” in recent years, the FCA also says it is concerned that current providers and potential new entrants may be facing barriers to growth and entry.
According to the regulator, stakeholders have said the nature of funding for lifetime mortgages may hinder growth, and that certain regulatory rules or standards may deter firms from entering the market.
Beyond funding, Leon Diamond, chief executive of LiveMore Mortgages, whose products include standard, RIO and lifetime mortgages, says he believes the industry’s wider understanding of the market remains a barrier to growth.
“Later-life lending is still often equated with equity release, and that can narrow both consumer perception and the way solutions are considered,” he says. “It can also make conversations more difficult for advisers if everything is framed through one lens.
“There is also the complexity of advice in this space. Advisers are often working across different product types with different rules and expectations, and that can create friction in delivering clear recommendations.”
Boyd at the ERC also says there are barriers on the demand side. “The government and regulators should normalise the use of housing wealth to maintain living standards in later life, and should invest in public information campaigns to do this.”
Hale echoes this. “It would be good to see the regulator support a national campaign around use of housing equity to support wants and needs in later life.
“Too much investment and focus is currently placed on pensions; whereas housing wealth dwarfs pension savings, and has the potential to make a more meaningful difference to the lives of older customers here and now.”
Chloe Cheung is a senior features writer at FT Adviser
