FCA ‘disappointed’ by poor advice given by lifetime mortgage advisers
Recent findings from the FCA suggest sub par advice is being given by lifetime mortgage advisers.
In a recent report they have said:
Looking at firms responsible for around half of all lifetime mortgage sales, the FCA found shortcomings included not enough discussion of alternatives and a lack of sufficient consideration of a client’s individual circumstances.
The regulator also stated it was disappointed to find evidence of firms not acting on its previous findings. For example, intermediaries were:
-poorly considering borrowers’ income and expenditure
-minimising discussions around alternatives
-incentivising sales potentially at the expense of quality advice and good customer outcomes
-steering outcomes in favour of lifetime mortgage products
If you are currently retired and looking to arrange a mortgage to refinance your current home or to buy a new one, given what the FCA has said, should you avoid a lifetime mortgage?
Firstly, how is a lifetime mortgage different to a traditional mortgage?
A lifetime mortgage, or more classically know as it’s umbrella term ‘equity release mortgage’ can be a fantastic option for certain clients. Particularly for those whose income could not obtain the mortgage amount required.
So instead of having lots of income to afford the payments, a lifetime mortgage instead requires the borrower to have lots of equity in their property and/or (quite morbidly) to be closer to life expectancy; both of these factors allow the lender sufficient comfort that, should the monthly interest payments not be made, even with the interest being added to the loan, it still won’t grow too big to be repaid should the lender need to take possession and sell the property. Such an instance most commonly happens upon the death or entry into long term care of the borrower, but nonetheless, this is the key ingredient in a lender’s decision to lend, or not.
Unlike lifetime mortgages of yesteryear, those in today’s market must allow the applicant the option to pay the monthly interest. If the payments are made, the loan doesn’t grow, it stays the same, just like a normal interest only mortgage.
With that being the case, a lifetime mortgage is just a ‘normal’ interest only mortgage, just with the added benefit that there is no ‘term’, the finance runs on indefinitely until the last of the borrowers named passes away or goes into long term care.
So why take a normal interest only mortgage rather than a lifetime mortgage at all?
Without sounding like every mortgage article ever written – this depends on your personal circumstances but generally three factors combine and can make a lifetime mortgage more or less suitable than a ‘regular mortgage’; Income, age and equity which can impact your:
-Affordability. Dependent on your income, age and equity you may be able to borrow far more on equity release rather than a regular mortgage and vice versa
-Rates. An 80 year old borrower looking to borrow 6 times income, with some credit blips would likely need to use a lender such as Livemore Capital on a ‘regular mortgage’. However rates would start at around 7.5%. This same client with a lifetime mortgage could potentially expect rates as low as 6%.
-Early repayment charges. Many regular mortgages offer low and short early repayment charges, meaning the percentage paid for redeeming the mortgage early could be as low as 2% or even 1% of the loan and only last for say 2 or 3 years. Lifetime mortgages often have larger early repayment charges at around 7% and lasting for 10 years or so. Dependent on your need or expectations to redeem the mortgage due to a planned home move or expected lump sums, a regular or lifetime mortgage could have a very different impact here.
As above, the devil is in the detail and ultimately this is the FCA’s point, any adviser in our market who is arranging a high number or worse, just one type of mortgage finance, just because they are most familiar with it, or worse, because they get paid more, simply aren’t doing their jobs properly.
If you speak to a lifetime mortgage/equity release mortgage adviser and they just try to arrange a lifetime mortgage with no consideration of a ‘normal’ mortgage, they are not doing their job properly. The reverse is true, if you speak to a mortgage adviser, (particularly if you are retired and over the age of 55) and they don’t at least discuss the alternative of a lifetime mortgage, they are not doing their job properly. Ideally any mortgage adviser helping retired borrowers, should be working in conjunction with an equity release/lifetime mortgage adviser to provide comparisons of what that finance might look like (costs, charges, maximum borrowing available)
I (and my colleagues) have long held this belief, but is fantastic to finally see the regulator take a stance and state this publicly.
