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13 Sep 2017

FCA plans to bring back retirement interest-only mortgages

The Financial Conduct Authority (FCA) is considering relaxing the rules around mortgage lending to bring back retirement interest-only mortgages.

In a consultation paper, the regulator explained: “Work for our forthcoming Occasional Paper on the Ageing Population has identified a regulatory barrier to a form of mortgage lending that could meet the needs of some older borrowers; in particular, older consumers with maturing interest-only mortgages and no repayment vehicle, and those seeking to release equity from their homes without the cost of interest roll-up.”

Retirement interest-only mortgages are interest-only mortgages for older consumers where, assuming there is no default, the loan is only repaid on a specified life event (usually the customer´s death or move into residential care).

Borrowers must still be able to afford the ongoing interest payments, the FCA noted, but ultimately the loan is repaid through the sale of the property.

The FCA previously reclassified retirement interest-only mortgages as lifetime mortgages, but it now says that this may be restricting consumer access.

“Retirement interest-only mortgages have significantly different risks compared to lifetime mortgages,” the regulator pointed out. “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.”

The consultation process will last for two months.

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