Lifetime mortgages - FSA capital requirement under the standardised approach

The FSA has released CP07/18, its quarterly consultation paper, which includes in chapter 3 an outline of the treatment of lifetime mortgages under the standardised approach. This confirms the approach agreed between the FSA and the ad-hoc working group led by the CML.

Under this approach lenders will be able to treat lifetime mortgages as a residential mortgage exposure, assuming the criteria set out in BIPRU 3.4.56-3.4.81 are met. However, rather than applying the normal risk weights to the current loan balance, as would occur with an ordinary residential mortgage, for lifetime mortgages it is applied to the balance including all rolled-up interest at the expected maturity, discounted using the 10-year government bond yield as the discount rate. The CML is to provide standard figures on these bond yields on our website. To calculate the expected loan-to-value, which will determine the risk weight, lenders should take the current value of the property. Further details on the calculate can be found in CP07/18.

No specific guidance has been given for firms using the Internal Ratings Based (IRB) approach but the guidance for standardised firms provides a useful methodological framework.