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The Financial Conduct Authority (FCA) is looking to allow the reinstatement of Retirement interest only mortgages on main residences by excluding them from the definition of a lifetime mortgage.
In a consultation paper the FCA plans to class Retirement interest only mortgages as a separate interest only mortgage for older consumers where, assuming there is no default, the loan is only repaid on a specified life event such as the customer’s death or move into residential care and the sale of the property.
The FCA thinks that these interest only loans into retirement could help older people whose mortgages are reaching the end of term with no, or a short fall in, repayment vehicle. Also older borrowers looking to release equity without wanting the final cost of rolled up interest when the property is sold or inherited.
The consultation paper said: “Retirement interest-only mortgages have significantly different risks compared to lifetime mortgages. In particular, they do not feature the roll-up of interest, meaning that consumers are not at risk of rapid equity erosion and the subsequent reduction of funds available for a bequest.
“Consumers are also more likely to be familiar with the product features of a mortgage involving interest payments. However, we do consider that there are some risks associated with lending with no fixed term and we are proposing to add a small number of additional requirements for the sale of these loans.”
Alice Watson, Head of Marketing at Retirement Advantage Equity Release, told the Financial Reporter: “It is great that these proposals could lead to a wider range of options available to older borrowers, but retirement interest only mortgages are not the only option. Retirees should ensure they are considering the full range of solutions available to them.
“Lifetime mortgages are a viable and a flexible option, and provide a number of safeguards that the proposed retirement interest only mortgages may not offer. Lifetime mortgage customers can choose an interest only option, where they repay just the interest on their equity release mortgage. One difference between this and the proposed retirement interest only mortgage is that, if customers miss their monthly interest payments, they can switch to interest roll up without threat of repossession, so long as they abide by the terms and conditions, which offers customers real peace of mind.
“The proposed retirement interest only mortgage may also be offered without the client needing to take financial advice. We believe this carries its own risks and could potentially leave the customer worse off. With lifetime mortgages, customers have the safeguards of financial advice, which means that a holistic overview to their retirement planning has been taken and the most appropriate solution has been recommended. Without seeking professional financial advice, there is a risk that customers may not be aware of which products are best for their particular circumstances.”
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