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Changes to equity release rules to boost take-up proposed


The Financial Conduct Authority (FCA) could relax some of the rules it applies to equity release products, in response to "evidence" that they have "restricted development and take-up" in the market.

It intends to make permanent a 'modification by consent' introduced earlier this year, which allows lenders to disapply the standard mortgage affordability rules where the customer is purchasing a type of lifetime mortgage that allows them to choose when to stop making interest payments.

The FCA's responsible lending rules require lenders to carry out an affordability assessment whenever interest payments are anticipated or required. In the interest roll-up model, however, the interest owed instead gets added to the value of the loan and is only repayable when the property is sold. This removes the risk of repossession applicable to a conventional mortgage.

"The cost of putting systems in place to check affordability is constraining lender entry into this market because lifetime mortgage lenders typically only offer interest roll-up loans," the FCA explained in its latest quarterly consultation paper, which rounds up a number of recent regulatory proposals.

According to the regulator, there had been "strong support" from both firms and consumer groups to the introduction of the modification by consent. It therefore proposes to make the modification permanent, subject to a small number of "minor" changes, for the purchase of lifetime mortgages which give consumers the option to convert to an interest roll-up product at any time.

A lifetime mortgage is one of the most common forms of equity release, which allows those aged over 55 to access some or all of the value of their home as cash. The loan becomes repayable when the property is sold, which is usually on the death of the homeowner. Equity release products are relatively popular in the US, but considerably less so in the UK and EU.

The FCA is also proposing to make changes to its rules on how firms should calculate the length of the term in the key facts illustration (KFI) document provided when an equity release product is chosen or recommended. These changes include how repayment information should appear in the KFI where payments are expected at the point that the product is sold, but may be rolled-up in the future.

The changes would give firms more flexibility to "tailor" the illustration to the circumstances of the individual customer by estimating the product using a different basis to the standard mortality tables where this is considered by the provider to be "more appropriate". The FCA has also proposed the use of more recent mortality tables to the ones currently featured in the Mortgage Conduct for Business Sourcebook, according to the consultation.

The FCA is seeking feedback on its equity release proposals until 2 November.

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