Older borrowers can experience difficulty in obtaining a mortgage these days, particularly where repayments will extend into their retirement. Interestingly, following some promptings by the Financial Conduct Authority (FCA), the Nationwide has recently raised the maximum age limit for its mortgages from 75 to 85. This followed on a move by the Halifax to raise its age limit to 80. Equity Release products take account of the borrower's stage in life and offer borrowing on terms that are not generally available on the standard mortgage market.
The FCA split Equity Release mortgages into two categories:
Lifetime mortgages: these mortgages are restricted to older borrowers above a specified age. The lender may or may not set a mortgage term. The borrower retains ownership of their home and gives security in favour of the lender in return for the loan. The borrower can opt to make repayments or choose for the interest on the loan to roll-up. The loan amount together with interest is repaid to the lender on the sale of the property upon the death of the borrower or on their going into long term care. In the event that there are remaining sale proceeds these would be paid out to the estate or the borrower, as the case may be.
Home reversion plans: the borrower sells all or part of their home to the lender in return for a lump sum and/or an income. The lender then becomes the reversion provider and the borrower becomes the reversion occupier. The borrower (occupier) is entitled to occupy at least 40% of the property. The plan can end on the death of the borrower (occupier), their moving into long term care or the end of a specified period of at least 20 years. On the plan ending the lender (provider) would sell the property and the sale proceeds would be paid out in accordance with the ownership shares in the property.
There are specific requirements in the FCA's Handbook for Mortgages and Home Finance: Conduct of Business sourcebook (MCOB) for equity release products and providers. These requirements can be found in MCOB 8 Equity release: advising and selling standard and MCOB 9 Equity release: product disclosure.
MCOB 8 seeks to ensure that: borrowers are adequately informed on the service they will receive from a firm in relation to an equity release product; advice is given in all cases; and any advice given is suitable for that particular borrower.
Under MCOB 8 when assessing the appropriateness of an equity release product, a firm should consider the possible adverse effect on the borrower's eligibility for mean-tested benefits and their tax position. Firms should assess whether any adverse effects outweigh the benefits of entering such an arrangement. Firms should also assess whether there is an alternative method of raising funds such as a local authority grant or taking a further advance on an existing mortgage.
In relation to home reversion plans borrowers should be made aware that these are long term investments of a complex legal nature for which expert independent legal advice should be sought.
MCOB 9 seeks to ensure that the borrower receives a clear Key Facts Illustration (KFI) and offer document prior to entering into an equity release transaction. These documents are designed to aid the borrower in comparing like for like products and costs before entering into an agreement with a lender.
MCOB 9 sets out prescribed information which must be included in equity release KFIs and offers. The term, interest rate calculation, benefits, risks, repayment options, porting options and termination options for an equity release product can differ significantly to that of a standard mortgage. The provisions of MCOB 9 depart from those of MCOB 5 and 6 to take account of these differences.
Equity Release Council
In addition to the MCOB requirements set down the by the FCA there are also industry standards. The Equity Release Council (ERC) is an expansion of what was previously SHIP (Safe Home Income Plans) and represents those who work in the equity release sector. Members of the ERC are required to sign up to and adhere to the ERC's Statement of Principles which is a voluntary industry code of practice. They must also sign up to the ERC's Rules and Guidance. The rules of the ERC go beyond the minimum regulatory requirements set out in MCOB. It is the aim of the ERC that consumers have confidence in the products and information offered by their members. The ERC requires its members to extend to consumers the protections and safeguards set out in the Rules and Guidance and Statement of Principles. The ERC have a three level approach to protection, comprising structured financial advice, face-to-face legal advice and product safeguards.
The ERC have set out that members can only state that a product meets ERC standards where all standards are met (Rule 4.1). In the event that these standards are not met, firms must prominently state this in adviser and customer facing literature. In addition, they must explain which standards are not met and illustrate the potential risks.
Under Rule 4 products must meet the following standards:
- Borrowers must have the right to remain in their property for life or until they move into long-term care;
- Borrowers must have the right to move to a suitable alternative property;
- In the case of a lifetime mortgage, interest rates must either be fixed or, if variable, with a cap fixed for the life of the loan;
- The product must have a "No Negative Equity Guarantee";
- Property Valuations must be carried out by an independent valuer in compliance with RICS standards.
Independent Legal Advice
The ERC require that borrowers take independent legal advice and their members must afford borrowers the option to instruct a solicitor of their choice (Rule 8). This rule comes with two evidential requirements.
Under Rule 8.1 there must be a face-to-face meeting between the borrower and a solicitor prior to completion. The guidance anticipates that solicitors will prepare a written report outlining the risks and rewards of proceeding with an equity release product, based on the offer issued by the provider. This report is expected to be issued to the borrower prior to meeting between the borrower and solicitor. The solicitor has a duty to ensure that the borrower understands the rights and obligations of entering into the contract.
Under Rule 8.7 a Solicitor's Certificate is to be signed by the customer and the solicitor confirming that the advice required under Rule 8 has been given.
The ERC's emphasis on independent legal advice does not just extend to their member's customers. Lenders are to be mindful of other persons resident in the property.
Statement of Principles notified to Borrowers
Rule 6.1 requires that provider members issue borrowers with a copy of the ERC's Statement of Principles. Alternatively provider members can advise borrowers that the Statement of Principles can be accessed on the ERC's website, or that copies are available on request.
For advice about regulatory compliance and industry standards please contact us.