An FCA consultation paper has set out plans to reintroduce retirement interest-only mortgages, which were redefined as lifetime mortgages after the implementation of MCD. The FCA says it "has identified a regulatory barrier to a form of mortgage lending that could meet the needs of some older borrowers", including those 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.
As a result, the FCA wants to exclude retirement interest-only mortgages from the definition of a lifetime mortgage. Retirement interest-only mortgages’ will be classed 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 (usually the customer’s death or move into residential care).
The FCA clarified that customers must still be able to afford the ongoing interest payments, but ultimately the loan is repaid through the sale of the property.
In its paper, the FCA 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."