Sarah Davidson, of This is Money
Sarah Davidson, of This is Money, writes: There is no direct evidence that advisers are deliberately pushing older mortgage borrowers into taking more expensive equity release loans.
Anecdotally, though, I sometimes hear the suggestion that some advisers may not be as independent as they should.
I have been told by more than one industry insider that the first question some retirement advisers ask an older borrower when they’re looking for a mortgage is: ‘Would you be prepared to lose your home?’
This can be a leading way of opening this kind of advice discussion.
A mortgage, either repayment or interest-only, has the contingent risk of your home being repossessed if you do not keep up with monthly payments.
This isn’t true for equity release and lifetime mortgages because there are no monthly payments, instead interest is rolled into the loan.
But there’s a pay-off for that security of tenure, and it’s the cost of the loan. Rates may be lower than ever in the lifetime mortgage but the fact that interest is compounded means borrowers end up owing considerably more.
For many equity release may still be the right choice, but consumers need to be safe in the knowledge that their adviser will carefully consider both options. A good trusted specialist financial adviser will do.
The elephant in the room is also that there is the potential for a commission bias that is creating an advice gap.
Mortgage brokers and equity release advisers both earn commission from lenders when they successfully complete a mortgage application for a client.
Mortgage brokers get paid somewhere in the region of 0.35 and 0.5 per cent of the mortgage amount when completing a retirement interest-only mortgage. On a £100,000 loan they’d receive £350 to £500.
Equity release brokers are also paid commission, but they can get a considerably larger 3.5 per cent of the loan amount. On a £100,000 loan that is £3,500.
The basic principle behind giving mortgage advice is to help the customer get the best solution to their problem.
But, the adviser has to have permission from the regulator to tell clients if that’s either a retirement interest-only mortgage or a lifetime mortgage, equity release in other words.
Generally speaking, mortgage brokers are not qualified to advise on equity release, so they refer them to retirement specialists.
It’s therefore equity release advisers who are in the best position to tell customers whether to take a lifetime mortgage or a retirement interest-only mortgage.
Therein lies the problem.
It is very hard to argue there is no commission bias for the adviser if by recommending a retirement interest-only mortgage to the customer they earn £500 but by saying you should get a lifetime mortgage, they’ll pocket £3,500.
While the FCA hasn’t said its investigation covers this point, it’s likely that they will be asking firms to justify themselves.
This is long overdue and, if it results in the scrapping of this bias it will be very welcome.