The booming Equity Release sector has been making the headlines again, this time triggered by the relaxation of affordability rules for interest-serviced loans. As long as the borrower has a contractual right to stop making payments and switch to a fully rolled-up arrangement, the FCA has bowed to pressure and conceded that an affordability assessment is not required.
Meanwhile we have heard from a number of new and existing players looking to innovate with a hybrid equity release product. The idea is a simple one – borrowers can take out a traditional repayment mortgage, which converts to a lifetime mortgage on retirement, either immediately or through a period of tapered payment reductions. The benefits of such a product are clear, and if distributors are prepared to re-tool with the skills and qualifications needed to advise on lifetime mortgages, this could become a significant new market. Technology can play a part here, helping the intermediary to navigate a new and unfamiliar proposition and ensuring that a compliant and consistent process is followed.
One potential concern is the issue of which regulatory regime would apply. Lifetime mortgages are exempt from the MCD, meaning that applicants must receive a KFI as opposed to an ESIS. However, the technical definition of a lifetime mortgage excludes contracts where the borrower is obliged to make capital repayments. The hybrid product has a repayment element, so presumably would fall within scope for MCD. This is all well and good, except that the ESIS is not designed to accommodate the features of a lifetime mortgage, such as the open-ended term of the contract or the way in which interest and other costs are structured. Furthermore, any calculation of the lifetime mortgage element would need to be based on projected property values, which are notoriously difficult to predict.
Of course, it will take time to work through these and other issues, but it is encouraging to see the regulator’s willingness to listen and respond to challenges from the equity release industry.