This document is to be read in conjunction with the Mortgage Advice Standards.
The definition of a MCD Lifetime Mortgage
The definition of a MCD Lifetime Mortgage is where:
- Clients are retired, or
- Clients aren’t retired, but will during the mortgage term, and
- The lender will seek full or partial repayment of the loan (and interest if rolled up) until one or more of the specialist life events occur
The specified life events are:
- The death of the client; or
- The client leaves the mortgaged land to live elsewhere and has no reasonable prospect of returning (for example, by moving into residential care); or
- The client acquires another property for use as their main residence; or
- The client sells the mortgaged land; or
- The lender exercises its legal right to take possession of the mortgaged land under the terms of the contract
You cannot advise on Lifetime Mortgages without first having obtained the required industry qualification (ER1) and then having had your licence granted by the Compliance Director.
All relevant Mortgage Advice Standards apply to lifetime mortgages, including debt consolidation.
You cannot source lifetime mortgages via the Mortgage Brain sourcing system, but you can use The Exchange to evidence your sourcing, and you will then need to obtain all KFIs (mortgage illustrations) direct from the lender (as these mortgages are exempt from MCD regulation, the KFI will apply rather than ESIS).
Lifetime Mortgage advice is subject to 100% checking of cases and you should notify the compliance department whenever you advise on a Lifetime Mortgage product. Any remedial work from the ‘case check’ will then need to be signed-off as satisfactory before a mortgage can complete.
A Lifetime Mortgage specific disclosure document must be provided to a client and this will confirm that your advice is limited to lifetime mortgages only, and not home reversion plans. Bespoke disclosure documentation is provided by the Compliance Department.
The Key (point of sale software) should be used to record your Lifetime Mortgage advice – adhering to the same minimum requirements of that for any normal residential mortgage.
4.1 Equity Release Mortgage Questionnaire
In addition, Advisers are expected to complete an Equity Release Mortgage Questionnaire which forms part of the fact find. Specific attention should be paid to the state of health of the clients because ill health can have a positive impact on the borrowing potential of an individual. The purpose of the loan must be clearly established in respect of whether a lump sum, or drawdown, or a combination product is the most suitable. Also, it’s imperative that all other avenues to raise capital must be explored before ultimately resorting to lifetime mortgage advice to achieve the client’s objectives.
Risks and Future Needs
It’s important that you take into account the client’s future plans as a Lifetime Mortgage is a long-term solution that can be expensive to cancel or replace. Future plans are especially important for those in the lower age range of equity release clients, or for those still in employment.
Therefore, you must discuss and document in the MRWL the following risks of releasing equity:
- Potential risks of losing the home – the client can live in the property for as long as they wish, provided they comply with the terms and conditions of the lifetime mortgage, e.g. the client may need permission from the lender before allowing any other person to occupy the property.
- If your client doesn’t comply, the lender has the right to request the amount owed and the client may lose their home.
- The impact of increases or decreases in house prices against the growing debt, e.g. loss of equity.
- The effect of death or long-term care on respective partners – where one of a couple dies, the household income may reduce and you need to discuss the impact of this on the survivor. The mortgage itself must be repaid on the death of the last survivor or if they move into long-term care.
- The effect if the client wants to move – if they want to move home after taking out a lifetime mortgage, it can be transferred subject to the lenders’ criteria at that time. If they decide to move to a smaller, lower value property, they may need to pay back some of the mortgage.
- The potential impact on their estate – by taking a lifetime mortgage with interest rolled up, the amount owed to the lender will reduce the amount left to the estate once the property has been sold by that amount. The client should be recommended to seek appropriate advice.
- The expectation that the client has to maintain the property – if they don’t, the lender may insist on repairs and charge this to the clients.
- The possibility that the client requires a further advance in the future – most lenders will offer access to further advances, subject to terms and conditions. The interest rate at the time of the further advance may be higher or lower than that originally offered at outset. This would also further reduce the amount left to the estate, as the loan amount will have increased.
Additional Suitability Requirements for Lifetime Mortgages
If the date of retirement is less than one year away for one or both clients, you must recommend that they seek appropriate advice on their retirement provision options. If this is declined, the MRWL must document this fact and point out the risks, i.e. that a change of circumstances could impact the advice being given and that the advice is based on their current circumstances.
An exception to the above is if the client requires an immediate lump sum for a specific purpose that is likely to be spent prior to retirement.
If the client is within four months of retirement and has all of their pension related income projections, the Turn 2 Us software can be used based on these projections and advice given as appropriate. The MRWL must make it clear that if these are incorrect, or the client’s intentions change, this may impact the advice given.
Means Tested Benefits (MTBs)
For all Lifetime Mortgages, the client’s eligibility for MTBs and the impact that releasing equity may have on these, must be assessed using the Turn 2 Us software. The results of this must be attached to your client record in The Key.
The key MBT that may be impacted are:
- Pension Credit
- Council Tax Reduction
- Universal Tax Credits
- Health Benefits
Releasing equity could also affect a client’s eligibility for Local Authority Grants and Social Funds if there’s a need for this in the future, as they may be means tested. This should be taken into consideration.
Equity Release Council (ERC)
It is recommended that lenders for Lifetime Mortgages should be members of the ERC. Further information can be found on their website www.equityreleasecouncil.com/home
If you wish to recommend a product from a lender who is not a member of the ERC, and you believe this product is justified, you must include the standard paragraph in the MRWL, indicating a non-member of the ERC. Please also include an explanation of who and what the ERC is, the protection this scheme offers, and the potential consequences of not having a product with the ERC mark.
Ways To Release Equity
FPG does not permit money to be released from a property to be used in the following circumstances:
- To be placed in an investment
- To purchase a BTL where repayment of the loan will be on death
- For inheritance tax planning purposes
- For significant funds to be placed on deposit for a later non-specific use
Money for ‘rainy day or emergency funds’ will be allowed, but this will be case specific and depend on the client’s lifestyle, impact on state benefits and how long the money is intended to remain in the bank account.
We would not expect this figure to exceed £10,000. Any figure in excess of this will require explanation. The amount must be reasonable when looking at the client’s income, property value and lifestyle, and this allowance is a guide only. The emergency fund should not be used as a ‘sweep up’ method of increasing the amount to the minimum or maximum. If in any doubt, contact the Compliance Department.
If the client’s objective is to generate an income you must, if available, recommend a specific lifetime mortgage that provides this facility.
If the money raised is to be gifted to family, there may be tax and legal implications. You must advise the client to seek legal and/or financial advice and give them time to do so. The MRWL must confirm:
- Whether they’ve declined to seek such advice, or
- Where advice has been sought, confirmation that the client wishes to proceed based on the advice they’ve received
If the client wants to release a lump sum to invest in a holiday home, this is acceptable. However, the customer must be made aware of the associated risks, including running costs, maintenance costs, council tax and associated travelling costs.
The client must also be informed that the subsequent property transaction may not be regulated.
Where the product recommended includes a drawdown facility, the MRWL must make it clear that this does not form part of your recommendation but is only a feature of the product. In the event a drawdown facility forms part of your recommendation, a clear future need must be identified in the fact find and fully explained in the MRWL.
Alternatives To Lifetime Mortgages
You must consider and discuss with the client whether other methods of releasing funds may be more suitable, and document these in the MRWL, or Notes section of The Key. You’ll need to consider what the client wants the money for and the amount they require. This is to ensure that you consider alternatives to equity release, such as grant for repair work or debt consolidation.
Where an alternative method is deemed more appropriate, you must recommend they proceed down this route. For example:
- Local Authority grants for essential repairs, e.g. leaking roofs, windows
- Use of existing savings
- Home reversion schemes – see below
Home Reversion Schemes
FPG Advisers are not permitted to advise on Home Reversion Plans.
If you consider that a home reversion scheme is the most appropriate method of releasing equity, you cannot give advice or make a recommendation. This should be documented in notes.
Home reversion schemes may be appropriate if:
- The client wishes to guarantee leaving a percentage of the property’s equity to their estate (there are lifetime mortgages that may now offer this as well).
- The client has a need to raise more funds than a lifetime mortgage will allow.
- The client’s attitude to ownership is not an issue as with home reversion schemes ownership transfers to the product provider.
Protecting Equity In The Property
Where the client has a desire to protect part of the equity in their property, a product that has this guarantee must be recommended, if available.
Existing Loans and Mortgages
The following are examples of when releasing equity to repay an existing mortgage may be appropriate:
- Where the client has a change in lifestyle, e.g. now retired and wants to have more holidays, enhance their lifestyle etc.
- Where the client has had an enforced change in their circumstances, e.g. now redundant or forced to take early retirement and wish to maintain their lifestyle.
- Where the client has an existing mortgage, which is affordable, but wishes to release monies now for a specific reason.
Where the client wishes to release money to fund for example, an endowment shortfall, you shouldn’t recommend a lifetime mortgage until the shortfall has crystallised, as subsequent funds to reduce borrowings could attract early repayment charges. Before recommending a lifetime mortgage to fund a shortfall, alternative methods must still be considered. If the endowment is due to mature within the next 18 months, you must state how the client will use the money and why they’re not waiting for maturity.
Remortgaging Existing Lifetime Mortgages
Where the client is looking to increase the borrowing on their existing lifetime mortgage, you must make them aware that it may be possible and more appropriate for them to take a further advance with their existing lender rather than move providers.
Where the client has an existing lifetime mortgage and wishes to remortgage to a more favourable interest rate, this is acceptable providing the recommendation is affordable. You should take into account the additional costs of setting up the new lifetime mortgage and any early redemption penalties, where applicable, in your affordability assessment.
Legal Advice or Family Involvement
- Recommend that the client seeks independent legal advice and explain why, e.g. to ensure they understand the contract they’re entering into. It’s good practice to carry out meetings with other parties present such as the client’s own solicitor.
- Recommend that the client consult with their family to manage expectations in the event of their death before the application proceeds. It’s good practice to inform the client that they can have a family member present at the meeting.
- Document these discussions in the MRWL and confirm whether or not the client decided to involve their family.
- Give the client adequate time to seek such advice and/or involve the family. Where the client declines these recommendations, this must be documented in the MRWL.
- Document in the fact find how family involvement is to be managed.
Power of Attorney
When dealing with the client’s attorney, the fact find should confirm that a power or attorney has been granted and include the attorney’s name.
You will need to obtain and attach a copy of the Power of Attorney to the record. You must check that the document is current and the attorney has the relevant authority to act on the client’s behalf.
You will also need to obtain identification verification for both client and attorney and attach copies to the record.
The MRWL should be in the name and address of the attorney and include their client’s name and address in the heading and first paragraph of the letter.
Further guidance around Power of attorney can be found on the Government website – https://www.gov.uk/power-of-attorney/overview.
Less Suitable Product
The client’s needs and preferences should be taken into account when making your recommendation. In the unlikely event that the client wants to choose a mortgage that is totally unsuitable, because it does not meet their needs and preferences, then you must not proceed with that mortgage product.
Mortgage Reason Why Letters (MRWLs)
Specific lifetime MRWL letters can be found in the POS library. You must ensure each MRWL is client specific and that it covers the key risks/areas that may have affected your recommendation. You must ensure that you use the correct MRWL according to the product recommended. The following letters are available:
Lifetime – where interest is rolled up
Lifetime – where some or all interest payments may be made
MRWL letter 2 must be used if the product may, at any time, include features of both interest only and roll up, or interest payments are made and it is deemed to be a lifetime mortgage by the lender.
Each MRWL should document the client’s key current circumstances that have impacted the advice you’ve given and detail why your recommendation is suitable. For example, you must reiterate back to the client:
- Their current financial circumstances and the conclusion that a lifetime mortgage is the most suitable recommendation for your client.
- The purpose of the loan (whether the benefit method is lump sum or income) and why.
For debt consolidation cases, in addition to the usual requirements, the lifetime mortgage MRWL must also explain:
- For debts being repaid out of equity, the interest rate applied to a lifetime mortgage may be higher than existing borrowings.
- As the term is likely to be extended, the overall cost is likely to increase.
- If a lifetime roll up loan is recommended – although no repayments have to be made interest is charged and rolled up onto the capital amount which increases the debt and therefore the overall cost.
Where a replacement MRWL is required due to a review by the Compliance Department, you will need to wait for their approval before re-issuing the letter to the client.
You must recommend that your client review their Will arrangements. Where the client hasn’t made a Will, you must recommend that they do so.