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Equity release - and younger borrowers - warnings from FCA - so why is this happening

Journalist: Samantha Downes, Currently at the I (business editing some Sundays (freelance) and Mortgage Solutions

ended 08. July 2022

In a recent ‘dear CEO letter’ the FCA said it was concerned younger borrowers were being offered equity release, and that while it did not mention the m/s word the regulator said some products may be being marketed/taken up by younger borrowers. 

I'm still writing this feature - looking for whether brokers are recommending this product to borrowers at the lower end of the ER age range.

Are these clients struggling to get a standard mortgage?

6 responses from the Newspage community

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David Robinson
Co-Founder at Wildcat Law
Affordability, affordability, affordability. As the cost of living crisis bites, more and more people are turning to debt to tide them over. Unfortunately this is coinciding with rising interest rates, which is making debt more expensive. The end result is the availability of credit is starting to dry up for many people just at the point they need it. This is why they are increasingly turning to Life Time Mortgages (Equity Release). Having benefited from years of house price growth, many people are sat on a tidy nest egg but cannot access it using the more traditional loan/mortgage routes due to having to pay higher rates of interests and hence high monthly repayments. Lifetime Mortgages do not need to be repaid during the life of the borrower (unless they go into full time care). This is making them very attractive to some borrowers. However, and it is a very big however, Lifetime Mortgages may not be suitable for many of these people. For a start many do not properly understand how they operate. The interest rates applied are often higher than standard mortgage rates and due to the interest "rolling up" on most products, borrowers can rapidly accrue significant debts on their property. The other risk that the regulator is very aware of, is the fact that some Lifetime Mortgages pay mortgage advisers higher Procuration Fees (effectively commission) to recommend their products. Whilst there is currently no evidence this is having an impact on recommendations, they are firing a very early broadside to warn any advisers tempted to profit. As with all financial products, Lifetime Mortgages are not bad per se, they definitely have their place, but there is a very real danger that the coming financial storm may result in their misuse.
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Aaron Strutt
Product and Communications Director at Trinity Financial
There are concerns that people over 55 or 60 may take equity release options when there are more standard mortgage products available to them. When clients are 55 or 60 they may be able to obtain a conventional mortgage or a later life-focused mortgage (RIO) at lower interest rates. They may even be able to stick with their existing lender. These products would also avoid the roll-up of interest, which increases with time as interest is paid and added to the balance of the mortgage. Ultimately, the regulator wants all financial options to be explored before locking into an equity release product.
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Samuel Mather-Holgate
Independent Financial Adviser at Mather and Murray Financial
The majority of equity release plans do not require financial underwriting or affordability assessments because they are designed to last a customer's lifetime. However, this lack of scrutiny could appeal to those clients who are finding it difficult to raise finance through a standard mortgage. I think the FCA are raising concerns that there are more appropriate solutions to customers in financial difficulties that equity release, such as traditional debt consolidation or even a debt management plan (I would always recommend using a free debt charity like StepChange). If customers are in this situation it is really important to seek advice at their earliest opportunity from someone who can consider all of their options.
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Scott Taylor-Barr
Principal Adviser at Barnsdale Financial Management
If the right advice is for a 55-year-old to have a lifetime mortgage, I don't think the FCA have a problem with that. Their concern is how many appear to be recommended that option above all others; someone in their fifties still has access to lots of normal mortgage deals, plus there are now Retirement Interest Only (RIO) mortgages too. The FCA's concerns, as far as I am aware, are that these options are not being fully explored before the recommendation of a lifetime mortgage is made.
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Stuart Powell
Managing Director at Advice Guru
It is the FCA's duty to spot trends in the Financial Services industry and act on them so it is not surprising that they have observed this trend. From my experience, lower aged borrowers (aged 55-65) are enquiring about Equity Release for one main reason. They have often come to the end of their existing residential mortgage. This is logical as mainly 25 year terms were sold in the late 1990s. Those who took out an Interest Only mortgage back then have often raised additional funds and their existing lender will not extend their deal and they struggle to remortgage. As Equity ReLease has no affordability checks and can be used as an Interest Only mortgage (or no payments made), this feels attractive to those struggling to find a lender to allow them to stay in their home.
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Paul Neal
Mortgages & Equity Release Advisor at First Choice Financial Services
To qualify for equity release you need to be over 55, Equity Release should be a point of last resort when you have exhauseted all other possibilites, there are many other products that are more sutiable such as standard mortgages, RIO and other oppertunities. However Equity Release can be a great product for those who dont meet the criteria. Yes it will erode much of the equity within a property but for those who are advised in the limitations it is a great product. We are seeing many people who took interest only mortgages that need repaying and no longer have the income to meet the affordabnility or those on a low income are using it to suppplimetn their pensions. Done right it can relieve alot of pressure to those needing it.