Despite the acknowledged need to cater to an ageing population, most of the big high-street lenders are not keeping up with small building societies in improving criteria for older borrowers
Major lenders stand accused of continuing to abandon older borrowers, with maximum age policies not fit for modern times.
Lending into retirement has been in the spotlight over recent weeks after Halifax, Lloyds and Nationwide revealed plans to raise the maximum age they would lend to, granting mortgages into a borrower’s 80s. Yet their main rivals rarely lend beyond age 75.
Instead it is the smaller building societies that have the most flexible approach to the elderly. Nine have no maximum age, although some brokers insist that, while the giants do not necessarily lend to as senior an age, their rates are more competitive.
The regulator also wants innovation to support the ageing population. Many commentators insist older clients are low risk – largely because they tend to borrow at low LTVs – and should beallowed to continue to hold a mortgage as long as they can prove they can afford it.
The Building Societies Association is in the middle of a review into lending into retirement, which began in November and is scheduled to last a year, with the aim of helping more older people to secure a mortgage.
BSA head of mortgage policy Paul Broadhead says: “Since November, there has been a marked shift towards increased flexibility for older borrowers. This is coupled with a better understanding and careful management of the diff-erent risks that apply to this type of lending.
“I am pleased to see building societies leading the charge. We are seeing innovation in the approach to underwriting and the development of processes better tailored to the specific circumstances of older borrowers.
“With the proportion of older borrowers only set to rise, this challenge must be faced by all lenders. Constructive work is under way across the market and I have high hopes for the current FCA project on the ageing population.”
Dudley Building Society operates with no age limit. Chief executive Jeremy Wood says: “The demand for what we offer is significant and so far we have seen no increase in credit risk. In fact, many cases have been markedly better. Our sector has a fantastic track record for innovation and for not closing the doors in difficult times.”
Looking at the detail of recent changes to retirement lending criteria, in July Nationwide will raise its threshold to the highest age of any of the major high-street names, upping its cap from 75 to 85.
The option will be available on all standard Nationwide mortgages up to 60 per cent LTV and for a maximum loan size of £150,000, with no change to acceptance criteria. The maximum age at application is 80, with a maximum age at maturity of 85. However, the lender is limiting the extended borrowing option to existing customers with sufficient retirement income.
Last month, Halifax and Lloyds extended their maximum age from 75 to 80.
However, the high street is not a patch on the wider building society sector when it comes to maximum mortgage ages. The BSA reported last November that eight of its members had no maximum mortgage age, five lent to 85 and a further five to 80. By last month these figures had risen to 11 with no limit, 10 to age 85 and six to age 80.
Meanwhile, Hodge Lifetime launched its 55+ Mortgage earlier this year, on which it lends up to age 95.
John Charcol senior technical manager Ray Boulger says: “Although older borrowers have largely been abandoned by the major lenders, options for these borrowers are continuing to improve. This is thanks mainly to the smaller building society sector and lenders operating in the lifetime market. We have seen innovation from both sectors.”
This is a very different picture from that of the rest of the high-street giants, with most of them lending as standard only to borrowers up to age 70 or 75.
However, most of the major lenders stress their published maximum age is not always their true cap because they may consider going longer on a case-by-case basis. Council of Mortgage Lenders spokesman Bernard Clarke highlights the example of where lenders sometimes allow interest-only borrowers who are unable to repay the capital at the end of the term to continue to live in the property as long as they can keep meeting payments.
Boulger insists the failure of large lenders to cater for those in older age can partly be attributed to technology and regulation. He says: “The fact Nationwide’s maximum age of 85 won’t be implemented until July says a lot about how long it takes it to make fairly basic IT changes. No doubt most other major lenders would be just as slow. This perhaps is part of the reason why, six months after publication of the CML paper on improving later-life lending, there has been little action from the major lenders.
“They appear to be inhibited from being more proactive in the market for older borrowers by both conduct and prudential regulation. The FCA says the MMR does not prevent lending to older borrowers but perception is everything.”
Yet the FCA insists it has encouraged lenders to develop more products for older people. The MMR does not ban lending into retirement but insists lenders ensure borrowers can afford their mortgage when they retire.
In May 2014 FCA mortgage sector manager Lynda Blackwell said many bigger lenders did not lend beyond age 75 because they relied heavily on automated systems. But she added the regulator would like to see more innovation in this area to enable more customers to borrow into retirement.
Last month, in the FCA’s review of how the MMR is being embedded in the mortgage market, the regulator reiterated that its rules did not set any age limit on mortgage borrowing. It found even where firms had maximum age criteria, some made exceptions for existing customers where this was in their best interests.
The report added: “There is no evidence the rules have prevented firms lending responsibly to consumer groups such as older borrowers. However, we are especially mindful that older consumers represent an increasing proportion of the UK population and it is important the mortgage market continues to develop a range of products that can meet their needs.
“Older consumers are not a homogenous group – they will differ in their asset wealth and income – and are best served by having a range of mortgage products and services available to them so they can find the option that best suits them.”
The CML too wants changes to criteria to enable more lending to older borrowers; it launched its own report on the issue last year.
In its response to the FCA’s discussion paper on the UK’s ageing population and financial services, it states there is a need for greater collaboration between different parts of the financial services sector, consumers, regulators and the Government to improve the range of options for older borrowers.
Clarke adds: “The CML has championed the needs of older customers and recognises they should have a wider range of options, where this is appropriate.
“We are also pleased the FCA has responded encouragingly to our work in pursuit of a more flexible approach to lending into retirement. Of course, we favour a market in which all lending and borrowing is responsible and sensible.”
However, some critics argue borrowers in their 80s may have insufficient income to meet payments. Many struggle for cash in retirement due to the toxic mix of a limited state pension and the retirement savings ‘timebomb’ where not enough income had been put aside for later life.
Yet lenders tend to make their decision on whether to allow someone to borrow into later life well before they have reached that stage, with mortgage terms typically being about 25 years. Many judge an older person’s ability to pay a mortgage based on their level of retirement saving at the point of application.
They may also take into account other income sources such as the potential to inherit wealth.
Lenders point out their affordability models are robust enough to maintain responsible lending. A spokeswoman for Lloyds and Halifax says borrowing “extending beyond retirement age will continue to require evidence of anticipated retirement income following the existing process”.
Clarke says: “The circumstances of individual borrowers will vary considerably and lenders will take into account all the relevant factors, including the reliability of pension income, the amount of housing equity held by the borrower and whether the application is supported by more than one source of income.”
Many experts point out lending to the older generation is less inherently risky. A lot of retirees have already spent years paying a mortgage so have plenty of equity either to remortgage or to use to buy a new home.
Trinity Financial product and communications manager Aaron Strutt says: “Older borrowers don’t tend to borrow a huge amount and they are generally at a low LTV.
“I am glad Halifax is giving the smaller lenders and equity release firms a bit more competition in this area especially as existing rates are often so much more expensive.
“We regularly receive enquiries from borrowers who think they are too old to get a mortgage, even though they are in their early 60s and they receive a good pension.”
SPF Private Clients chief executive Mark Harris says: “Demand for borrowing into retirement is only going to increase as people live longer and buy their first home later. Someone buying in their late 30s, for example, may prefer a 30-year mortgage to keep payments affordable, which could take them into retirement.
“There have been suggestions this is the start of a free-for-all and people don’t want to be saddled with mortgages in retirement. However, lenders can’t be accused of acting irresponsibly because borrowers who require funding beyond retirement age must still prove their income and affordability. If you can’t afford the mortgage, you won’t get it, no matter how relaxed the lender’s policy is on lending to older borrowers.”
Greater flexibility in lenders’ age criteria also helps older mortgage prisoners, increasing their borrowing options.
Harris says: “Since the MMR, some people have struggled to remortgage, including older borrowers, many of whom have been trapped with their existing lender.”
Boulger says: “Without the option of remortgaging to a new interest-only mortgage, some older borrowers coming to the end of their existing mortgage term, despite having plenty of equity, would have to sell and probably go into rented accommodation for the rest of their life.
“The rent would almost certainly be more than the interest-only mortgage payment, so forcing anyone to do this would not only be economic madness but would destroy security of tenure at a time when people shouldn’t have to worry about this.
“What better, and more certain, repayment strategy can there be than that the property is sold when the owner no longer needs it, because they have died or gone into care?”
Lending into retirement is also a useful alternative to equity release, which can be expensive.
Changing demographics mean caring for older and retired people has become a dominant issue for society as a whole, not just the mortgage market. The UK has 11.6 million citizens aged over 65; by 2034 this group is estimated to total around a quarter of the population.
So are more mortgage lenders likely to increase their maximum age for lending?
Boulger says: “With two of the top-five lenders extending their maximum age, it can only be a matter of time before others follow
“However, the reality is most of the major players have abandoned low-risk, more mature borrowers – many of whom need only a relatively low LTV – and left this sector of the market wide open to smaller and more nimble competitors, especially for borrowers over 60.”
Strutt adds: “The biggest banks and building societies have been under a lot of pressure to make changes and ensure older borrowers do not continue to feel penalised.
“Other lenders will ease their age criteria over the coming months and years but they may follow Nationwide’s lead and initially limit changes to existing customers.”
Some industry figures have called on large lenders to do far more to help older borrowers. Gocompare.com head of money Matt Sanders says: “If a borrower can show they can afford mortgage repayments, their age should be immaterial.
“There are plenty of baby-boomers with reasonably generous final salary pensions who can afford to carry some debt in their retirement, and many more will be choosing to work for longer too, not only because they have to but because they want to.
“Older people should be able to make the same choices about managing their money as the rest of the adult population.”
Meeting the needs of older borrowers
We have been looking to develop products to meet the different needs of customers at different stages throughout their life. Using this approach, we are now looking at how to better serve our older customers.
In February, we announced a significant change to our maximum age for retired Nationwide mortgage customers, allowing them to borrow up to the age of 85.
The specific need we are looking to serve is where customers want to use the equity in their property to support their lifestyle. This may include a need to alter their current home so that they can continue to live there for longer, or to have the option to move to be closer to loved ones. They may also wish to provide financial support to family, including paying for large one-off expenses such as a wedding, assisting a grandchild through university or helping a relative to raise a deposit for a house purchase.
In order to afford monthly payments, these customers will need a robust, stable and ongoing retirement income. This could come from a range of different sources such as defined benefit pensions, annuities or other investments.
This approach will not be suitable for all our retired customers, which is why we have included certain controls within the product design, such as not allowing lending for debt consolidation purposes.
We have also carefully considered the additional risks older borrowers may face, including increasing health risks and the ability to support payment of the mortgage if, for example, part of a joint income is lost during the mortgage term. These are reinforced by the maximum application age of 80, limiting the LTV to 60 per cent and capping maximum loan size to £150,000.
This is the first stage of work to meet the needs of our older customers and we will continue to learn from the market. Both regulators and the Government have encouraged innovation in providing options for older mortgage borrowers and we hope more lenders will join us to provide more choice for that sector of the market. Most importantly, we will continue to learn from our customers as they will provide us with true insight on what products we should offer.
Henry Jordan, head of mortgages, Nationwide