As the retirement age climbs and parents look to help offspring on to the housing ladder, mortgage models are changing. Natalie Thomas reports
Life might begin at 65 but historically for many borrowers this has been when their mortgage options came to an end. Reaching retirement used to indicate a time to don the slippers and enjoy a quieter life, safe in the knowledge your mortgage had been paid off. This is no longer the reality for many homeowners, who are finding that despite their working life coming to an end at 65, their mortgage isn’t – either out of necessity or choice.
Many lenders have already adapted their policies to cater for the growing army of later life borrowers, but as the retirement age and life expectancy both continue to increase, the needs of these borrowers look set to grow even further.
As the broker market grapples with the threat of digital mortgage advice, later life lending also represents a huge opportunity as an older generation of borrowers will potentially be looking to brokers for advice.
Secure Trust Bank Mortgages managing director Esther Morley expects demand to grow not just for equity release products but also for more traditional mortgage products that lenders are able to advance to customers beyond their retirement age, based on their income.
“By 2040, nearly one in seven Britons will be over 75, according to the Resolution Foundation think tank,” she says. “Yet, just 35 per cent of people aged between 45 and 54 have given a great deal of thought as to how they will manage in retirement, according to the Financial Conduct Authority’s Financial Lives report.”
Legal & General Home Finance chief executive Steve Ellis says more consumers are reaching their 60s without the savings they need to have the retirement they’ve always wanted. and some with outstanding mortgage or unsecured debt. “The decline of final salary pension schemes and the thousands of interest-only borrowers approaching retirement age without a plan to pay off their loan mean that borrowing into retirement is a reality for many people.
This is a key factor driving the growth of the lifetime mortgage market,” he says. In addition to this, first-time buyers also continue to struggle to get on the housing ladder, which Ellis says is leading customers to “gift” their inheritance early by using their own housing wealth to help loved ones. There is also an older generation of entrepreneurs and they are increasingly looking for flexibility in their finances, according to Aldermore director of mortgages Damian Thompson.
“Over-50s account for 43 per cent of those who start their own businesses in the UK, according to the Office for National Statistics,” he says. “Crucially, this age group is growing, with ONS estimating that the percentage of the UK population over 65 will increase from 18 per cent in 2016 to 24 per cent by 2036.”
With changing trends in home buying seeing people going through the home buying cycle later in life than a few decades ago, the retirement lending market is embarking on a period of unprecedented growth. This is predicted to expand drastically in the next 10 years, from £86bn in 2018 to £142bn in 2027, according to the Centre of Business and Economics Research.
Thompson says that Aldermore have latent demand for financial liquidity to start a business, to pay for a dream holiday, or to help their children or grandchildren get on the housing ladder, but don’t believe there is any product available to meet these requirements.
“It’s our job as an industry to find new solutions to cater to these shifting needs,” he adds.
Up until the last decade or so, equity release was the only option on the menu for those aged 65 or over who were looking to utilise their property to fund their retirement.
The sector, however, was not a favourite of the press and generated many negative headlines in its infancy, which could help explain why later life lending does not seem to have captured the imagination of some lenders, or indeed brokers. SDL Group’s group commercial director Rob Clifford says that while some lenders have over time and more recently relaxed their maximum age limits to better accommodate this type of borrower, on the whole there is a reluctance in many quarters to operate in this arena.
“There is also the fear of negative publicity if, for instance, possessions increase and impacts on vulnerable, elderly customers,” he says. Clifford adds that some brokers may shy away from later life lending as it is an advice specialism and needs competence and care. Others, he says, may feel that it’s not worthwhile to gain the relevant qualifications, or they may even have concerns over mis-selling challenges from relatives of potentially vulnerable clients. Ellis says there can be a tendency to view later life products and advice as complicated, with some advisers not knowing how to move into this market.
“Growing distribution is central to growing the lifetime mortgage market,” he says. “In the mainstream mortgage market, advisers are often dealing with two-, three- or five year fixed rate mortgages. In the lifetime mortgage market, products span an average of 15 to 20 years and loans are repaid when the customer dies or moves into long-term care. That means the advice process also needs to consider aspects like wills, estate and tax planning. This will usually involve conversations with the wider family too.”
Morley says lending into retirement isn’t one-size-fits all and requires an individual approach, so not all lenders are geared up to lend to clients in this demographic. “The key for brokers is to understand which lenders are able to provide the support and understanding their clients’ needs and to establish communication with these lenders so they can discuss their cases,” she says.
Later Life Academy managing partner Stuart Wilson believes brokers generally feel confident in the products available for those in later life but he says the challenge is that brokers need to feel confident in joining the “product silos” together. “It’s not even necessarily about advising in regulatory terms, but guiding a client as to how different areas may be related and impact onto the core advice, i.e. should a client consider a retirement interest-only mortgage or equity release, and the answer to both of these is to a degree impacted by the clients’ options under pension freedoms,” he says.
In March this year, the FCA reclassified RIO loans as standard mortgages rather than lifetime mortgages or equity release. RIO mortgages allow consumers to keep paying monthly interest payments until they die or go into long-term care. The lender then gets the rest of their loan paid back through the sale of the property. But Wilson says the decision is potentially a dangerous one. He says: “On one hand it’s a real positive that this can open up more product choice for older borrowers and will help diffuse the ticking interest-only time bomb, but we strongly feel that advisers need a specific set of skills as this client group is different – in mental capacity, pension options and planning, family involvement, benefits and in the need for a full appraisal of all alternative options – as prescribed to equity release advisers.”
He says some of these have been loosely addressed in the RIO requirements but he feels they don’t go far enough. Equity release advisers must hold the CeRER (Certificate in Regulated Equity Release) from the IFS or the CER (Certificate in Equity Release) from the CII but for RIOs, Wilson says most providers do not ask for an equity release qualification but simply that advisers hold a basic
He adds: “So, yes, it’s good for clients and potentially the equity release sector by having RIOs available but in essence they were virtually already in existence with the likes of Marsden, Shawbrook and Family Building Society. So, we now feel the job should be completed by looking at training and perhaps qualifications to more
accurately tune advisers into the client, not the product group.”
Later life lending might be the elephant in the room but brokers may not be able to
ignore it for much longer. “The facts overriding all of this is that the UK has an ever-ageing population,” says Wilson. “Pension forecasts as defined benefits are being
replaced by vastly underfunded defined contributions pensions.
“More fluid retirement structures and people’s needs and expectations for spending in retirement will lead to an ever-increasing demand for a broad range of retirement
borrowing products. This is then compounded by the interest-only problem of many
thousands of clients in the coming years being pushed to repay current mortgages.”
He predicts that the equity release market will head towards £10bn within five years and later life lending in general, incorporating equity release and first-charge mortgages to over 55s, will be moving towards £30bn over the same timeframe. But Wilson adds: “We must be vigilant and cascade the high standards of advice in the equity release sector to ensure that all older borrowers get robust and joined-up advice and a guidance process.”