By Esther Morley, managing director of mortgages, Secure Trust Bank
Risk awareness is one of the values that underpins our business and our approach to lending. To me, risk in all its forms is the most important factor when considering lending into retirement – for the broker, lender and customer alike.
With an ever-growing number of interest-only mortgages owned by the over-55s maturing, we expect to see more applications from those who are approaching or already in retirement and are yet to pay off their mortgage debt, not to mention those looking to release equity to help support their retirement. Herein lays a plethora of risks for both the adviser and the underwriter down the line.
In the early stages, there is a risk in sandboxing customers – the FCA’s recent paper on the Ageing Population defines older customers as those “over 55”¹. But is this divide too high? By the time you reach the age at which you can first draw your pension, it’s already too late to do much about it if your pot isn’t quite as full as you were hoping.
UK Finance also recently revealed data that showed one in three mortgages taken out by those under 55 ran beyond state pension age². But, at the same time, I’m not quite ready to be called an ‘older customer’ just yet.
Being ‘over 55’ is also a very broad term. Someone who is ‘55 and a day’ is likely to be a lot more on the ball than someone who’s hitting triple digits (apparently one in three of us can expect to reach this milestone now), yet they’re dumped in the same category; and age isn’t necessarily the defining factor!
This is where the broker must be overtly diligent in his evaluation of risk as assessing mental capacity is by no means a simple task – indeed, it’s actually a complex discipline of clinical medicine. The lines are very blurred as to how this assessment can shape the advice you give, yet our combined obligations to deliver a fair service and a suitable product are, as ever, crystal clear. This is why I believe it’s even more important in this area of practice that our recommendations and assessments are properly evidence based.
This is a growing market of which it is important to be a part
The requirement that the applicant obtains legal advice before entering some of these more complex arrangements goes some way to assisting us in mitigating risk, but I support the argument made by the FCA that greater levels of access by third parties should be afforded in these types of case, whether it is a family member or perhaps even a charitable organisation.
Affordability is another risk consideration as circumstances into retirement are just as likely to change, but those changes could be much more impactful in later life. There is always the chance that, early on into claiming their pension, the customer could simply draw out their lump sum and blow it all on a sports car.
But there’s the more devastating risk that mortality can catch up with our borrowers – and that is why our own affordability criteria are quite firm when it comes to joint incomes in retirement, as the hardest time of a widower’s life can be made even worse when the loss of one of those incomes puts their home at risk.
With people living for longer and retiring later, I am confident that this is a growing market of which it is important to be a part. It is not without its risks but, with awareness and education, we can ensure that customers are making informed decisions in later life that will see them continue to enjoy their homes and lifestyles for longer.
1. Financial Conduct Authority (2017), Ageing Population and Financial Services, Issue 31, pp.7
2. Council of Mortgage Lenders (2017), Later life borrowing. New mindsets: old silos, pp.12