In its recent quarterly consultation, the FCA has set out proposals to amend its Handbook to facilitate retirement interest only mortgages for older consumers.
As part of ongoing wider strategic work on financial services and older consumers, the FCA has identified a regulatory barrier in its current Handbook to a form of mortgage lending that could meet the needs of some older borrowers. In particular, those borrowers with maturing interest-only mortgages and no repayment vehicle, and those seeking to release equity from their homes without the cost of an interest roll up mortgage.
When it implemented the Mortgage Credit Directive (MCD), the FCA re-defined retirement interest only mortgages as "lifetime mortgages" in its Handbook. The FCA are now re-visiting this approach. They are concerned that when they did this, they may have unintentionally restricted consumer access to retirement interest-only mortgages, which may be appropriate for some borrowers who are unable to repay their existing interest only mortgages (or be able to meet the affordability requirements to re-mortgage) when their existing mortgage comes to an end.
The FCA wishes to facilitate the offering of retirement interest-only mortgages. These are mortgages for older consumers where, assuming there is no default, the mortgage has no fixed term and is repaid on a specific life event (usually the customer's death or their move into residential care). Customers must be able to afford the regular interest payments but the loan is ultimately repaid through the sale of the property.
Approach and Handbook Changes
The FCA's approach is to make some changes to the Handbook that will distinguish between retirement interest free mortgages from lifetime mortgages. These are set out in their Quarterly Consultation CP 17/32. Specifically, they propose to:
- create a new defined term – "retirement interest-only mortgage"; and
- exclude a retirement interest only mortgage from the definition of a lifetime mortgage.
They are also looking to amend the guidance provided in MCOB 11.6 (on acceptable repayment strategies) to add a retirement interest only mortgage as an example of where sale of the property at the occurrence of one or more specified life events could be an acceptable repayment strategy.
At the same time, the FCA wish to correct a second consequence of their MCD implementation in which they partially dis-applied the requirement that lifetime mortgages must be restricted to customers above a specified age. The Glossary definition of lifetime mortgage will be amended, to restore the intention that entry into all lifetime mortgages should be restricted to consumers above a certain age.
Finally there are some additional disclosure requirements for any retirement interest sale to mitigate the risks of potential customer detriment in MCOB 4.4A, 4.7A and 5.4.
The FCA is already separately undertaking a thematic review on interest only mortgages, which was first announced in its 2017-18 Business Plan. That review is specifically addressing whether lenders are treating customers whose interest only mortgages are nearing maturity fairly, but it is not clear whether the recent announcement is linked, or how it fits with the work of the thematic review.
Retirement interest only mortgages have different risks compared to lifetime mortgages and the industry has so far viewed the FCA's proposals as generally positive. Importantly, they could lead a wider range of options available to older borrowers which is good for consumers. The FCA also believes such products are easier for customers to understand (as they are similar to existing interest free products) and less risky, as equity in the property is not rapidly eroded owing to interest roll up.
Responses to these proposed changes must be submitted to the FCA before the end of October 2017 which is when the consultation period closes.