Home reversion plans and Muslim mortgage advice coming

The FSA is to regulate home reversion plans and Muslim mortgages [photo:Pixmedia] Home reversion plans and Sharia-compliant Muslim mortgages will be regulated alongside standard mortgages from April next year.

The Financial Services Authority (FSA) currently regulates the majority of home purchase schemes in the UK and makes sure mortgage advice is appropriate, but Islamic mortgages and home reversion plans escape this regulation as they are based on sale and lease-back of properties rather than borrowing money secured on a property directly.

Changes to the rules, however, will mean people who want to take out either of these products will have the same consumer protection that is already in place for standard mortgage and other equity release schemes from April 6th 2007. This change comes after parliament approved the necessary secondary legislation last month.   "Regulation of these sale and lease arrangements introduces important new protections for consumers in the housing market," said Dan Waters, FSA director of retail policy.

"It will help older consumers looking to release equity from their homes by extending protection over both sectors of the equity release market.   "It will also ensure fairer treatment for consumers wanting to buy their homes in a way that is compliant with Islamic law, building on the work that we have already done in the field of Islamic financial services to improve consumer access to these products."

Since August 31st 2004, the FSA has regulated mortgage lending. This saw the end of adverts with low headline interest rates while the true costs of the mortgage was hidden in the small print, and made Key Facts Illustrations (KFIs) compulsory.   FSA regulation also means consumers will get mortgage advice that makes sure they are sold suitable products taking account of their circumstances and needs; and if things go wrong, they are able to obtain compensation.

Under Sharia, or Islamic, law Muslims are forbidden to pay or receive interest, excluding them from the majority of financial products.   With Muslim or Islamic mortgages, banks buy the home on behalf of a client - contributing up to 90 per cent of the purchase price. The customer then pays the remaining percentage upfront (like a deposit) and repays the outstanding amount over an agreed term, together with a rental payment.

With home reversion plans consumers can sell some or all of their property to a third party. The homeowner can remain in their property until they die or move into permanent care without having to make any payments. The percentage of the property sold reverts to the finance provider on death.

Providers of lifetime mortgages have argued home reversion plans had previously enjoyed an advantage over them due to their lack of regulation.   With lifetime mortgages, older homeowners access some of the value of their home by taking out a standard mortgage and simply deferring payments until the property is sold - meaning lifetime mortgage providers have always been covered by FSA mortgage regulation.

Reference:
www.myfinace.co.uk