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Cover story: Age barrier

Despite their awareness that more people are working beyond retirement age, the major lenders are failing to service the UK’s older population with home loans

Cover

The traditional British notion that life after 65 involves a blissful, mortgage-free existence is fast being consigned to history as average life expectancies soar and older people, assisted by the previous government’s 2011 scrapping of the default retirement age, increasingly elect to work well beyond state pension age.

One cannot accuse the major mortgage lenders of ignorance of demographic developments in this respect as their spokespeople have statistics coming out of their ears about ageing babyboomers.

For example, RBS economist Rupert Seggins refers to the latest projections from the United Nations that suggest the proportion of over-65s will rise from 18 per cent of the total population this year to 23 per cent in 20 years’ time. He highlights this as a big shift because, by way of comparison, it took the UK from 1955 to 2010 to achieve a similar rise of 5 percentage points in the 65-plus population share.

Seggins also points out that, alongside this, the share of people over 65 who are still in employment has doubled from around 5.5 per cent in 2000 to around 11 per cent now. He believes this trend will continue, partly because older generations of the future will have fewer people of working age to help generate growth, employment and income in the economy.

But despite major lenders’ awareness of the statistics, they are often far from obliging when it comes to servicing our older folk with home loans. This contrasts notably with the small building societies, which have carved out successful niches in this area. However, although plentiful, players such as Bath, Buckinghamshire, Harpenden, Ipswich, Kent Reliance, Mansfield, National Counties, Newbury, Saffron, Scottish and Vernon are unlikely ever to enjoy the funding levels necessary to address the wave of imminent demand.

According to the Council of Mortgage Lenders, over a third of mortgages now being taken out extend beyond the borrower’s 65th birthday, as soaring house prices have pushed up the average age of first-time buyers and created an increasing trend for 35-year terms to keep repayments affordable. Despite this, around 80 per cent of such mortgages are repaid by age 70.

Furthermore, the cupboard for borrowing in retirement, as opposed to into retirement, remains particularly bare. The over-65s accounted for less than 1 per cent of all new lending last year, including equity release lifetime mortgages. This proportion has been in decline since 2007 – apart from a small uptick last year attributable to strong growth in lifetime lending.

The major lenders

Mortgage Advice Bureau head of lending Brian Murphy says: “Smaller building societies have been providing good, effective services in this area for a while but larger lenders have restrictions above age 70 or 75 and I feel this is, to an extent, a systems issue. They are very much geared towards factory production so, if they are dealing with clients out of the mainstream, it’s a hassle.

“I believe a number of big lenders have had tunnel vision. There is a wall of people coming up in the next five to 25 years who want to have debt in retirement and, more importantly, can afford it. Many of this generation have gold-plated final salary schemes. “There needs to be a significant review of the way people are assessed, particularly around the cut-off point at about 70, because if you look at any other walk of life you can’t discriminate.”

At first glance, the policies of major lenders at least seem moderately sympathetic towards those who require mortgages to run five or 10 years beyond traditional retirement age. Santander will lend up to age 75 if the borrower intends to stay in work until then. Halifax will consider any application up to age 75 but affordability is based on retirement income when extending beyond the customer’s anticipated retirement age or state pension age, whichever is lower. RBS/NatWest will lend to customers up to the earlier of age 70 or their expected retirement date and will make exceptions to this policy, depending on individual circumstances.

However, in practice, the major players are clearly not champing at the bit to take on such risks. Westminster Wealth Management independent mortgage broker Andy Wilgoss cites an example of a mortgage he recently arranged for a couple in their 60s who had come to the end of their mortgage term with the Woolwich, which would not offer them an extension.

The wife was aged 65 and retired with a pension income and the husband, aged 67, intended to carry on working for a further three years. In addition to his salary, he could demonstrate a £600,000 pension pot. But all the big lenders said the case fell outside their criteria and it ended as a choice between Kent Reliance and Newbury Building Society, with the former getting the business.

Wilgoss says: “The husband was a pretty switched-on guy and good at providing information but the bigger lenders kept on saying it didn’t fit in with their policies. Not everyone has a £600,000 pension pot but, for the right cases, it would be brilliant to have more lenders.”

Smaller building societies

So what can the large lenders learn from their smaller counterparts, most of which are prepared to lend well beyond age 75? For example, Bath has no maximum age limit while Ipswich will lend up to age 85 and National Counties up to age 94. Significantly, all three building societies are adamant that they have never had a problem with an older borrower where age has caused complications with repayments.

These smaller players do not have specific product ranges for older people but stress that their ability to take a more flexible approach, using manual underwriting and avoiding computerised credit scoring in all cases, is what sets them apart from the major lenders. But they highlight the importance of acknowledging that lenders have a particular duty of care towards older people.

It is therefore necessary to ascertain that they are still capable of making decisions and to ensure that they discuss with their next of kin the implications for their inheritance of any borrowing. It can also be useful to have in place a power of attorney at the time of setting up the mortgage.

Significantly, the smaller players believe that older adults will adopt a responsible approach towards the pension freedoms introduced this April, being unlikely to blow their entire savings on a Ferrari when it could cost them their home.

Ipswich Building Society general manager of business services Ian Brighton emphasises that, when someone is retired, their income is fixed, so there are not the payment risks that exist for younger people, such as unemployment, loss of overtime or ill health. Mortgages beyond age 70 account for around 10 per cent of the Ipswich mortgage book and these customers are typically asset rich and often own another property, tending to take out an interest-only mortgage and to sell the other property at the end of the mortgage term to pay off the capital.

Brighton estimates that around 50 to 60 per cent of Ipswich’s business for older people is to remortgage the main home, representing a more affordable alternative to equity release to raise capital.

National Counties Building Society, which reports a 49 per cent increase in applications for mortgages ending at or beyond age 75 in 2014 compared to 2012, also estimates that about 60 per cent of its book for older borrowers is for remortgaging. Director of business development Keith Barber quotes his underwriting team to the effect that the top reason for remortgaging is to give money to children or grandchildren, either to help them get on the housing ladder or to assist with university fees. The second-biggest reason is to purchase a buy-to-let property to improve income and the third is to buy a second home. National Counties has even lent £45,000 to an 80-year-old to buy a houseboat.

Barber says: “There has been pressure in the market resulting from the other lenders not being able to continue mortgages past 75. Although equity release can reduce inheritance tax liabilities by creating a debt on the estate, the driver to the standard mortgage is a much lower cost. There is a big space here for advisers to fill to help older people draw down on all their assets, particularly with the new pension freedoms.”

HSBC is unusual among the major players in offering a product with similar flexibility to smaller players’ deals but, although it started a pilot scheme with Countrywide Mortgage Services last October and last week began working with London & Country, the fact that it has not used intermediaries explains why this has not been on their radar.

It will generally lend up to age 65 for interest-only and age 75 for capital repayment but applicants beyond these ages can be considered where they are clearly able to evidence their ability to service the mortgage for its full term and, in the case of interest-only applications, demonstrate the ability to fully repay the borrowing at the end of the mortgage term. All borrowers wanting a mortgage term beyond normal retirement age or seeking an extension are referred to an underwriter for a manual appraisal.

HSBC head of mortgages Tracie Pearce says: “There comes an age when we need to be more cognisant of income going forward, and it’s an opportunity for us to have a proper conversation with the customer, finding out things like when they intend to retire and how they intend to repay.”

The regulatory issue

Interestingly, Pierce notes that the Mortgage Market Review is “not holding us up in any way”, describing the suggestion as “a misnomer” because banks and building societies have always been required to lend responsibly. This differs from the stance of other major lenders, which tend to be quick to point to the MMR as a restrictive factor in lending to older people.

Lloyds Banking Group director of intermediaries Mike Jones says: “As a responsible lender, we need to ensure that mortgages taken out by customers suit their needs and circumstances and that they are able to repay them and are not likely to face financial hardship.

“The FCA has introduced the MMR to ensure that responsible lending practices are applied consistently across the industry and that customers gain advice on products that meet their needs and circumstances. We are fully supportive of the changes.”

In fact, the wording of the MMR does not state that lenders should not lend to older people. It reads: “Lenders must consider whether the borrower can continue to afford the mortgage following a known change in their income, such as retirement. Our aim is to prevent unaffordable lending in retirement, not to prevent all lending into retirement.”

London & Country Mortgages associate director of communications David Hollingworth says: “Of course the MMR puts the focus on responsible lending but the way lenders interpret it is to have a maximum age cap at 70 or 75, even if someone can demonstrate reliable pension income. “Back in 2007, many major lenders had no cap in place and you could do interest-only as well, but it’s now much harder. There is no actual cap mentioned in the MMR and, in the MMR review later this year, if the regulator finds major lenders have gone too far in their interpretation, it could help.” John Charcol senior technical manager Ray Boulger says: “The bigger lenders should be doing more and fear of regulation is undoubtedly an issue. If lenders think there is a risk of things coming back to hit them at a later stage if they lend to older people, it’s the responsibility of the FCA to do everything it can to address concerns they may have and persuade lenders to be more innovative.” MAB’s Murphy even suggests that the imposition of blanket age restrictions by major lenders could be regarded as a violation of the MMR because one of the changes that the regulations were designed to make was to ensure that people were underwritten on the basis of their individual circumstances. He says: “I think we will have to see changes in the standard lending market but it may take several years. If one big bank changes its stance, there is a good chance that others will at least review their policies. But, if there is no change, we will see equity release providers increasingly eyeing up the market.”

Equity release

Retirement Advantage is watching the equity release space keenly. It reports an 11 per cent increase in the first half of 2015 over the second half of 2014 for people clearing existing mortgages by using its Interest Select lifetime mortgage. Additionally, it is working on new products to address the problems of older people who cannot get standard mortgages.

Hodge Lifetime is also experiencing a lot of demand from those at the end of their standard mortgage term to remortgage via its Retirement Mortgage hybrid product – a lifetime mortgage that offers the chance to convert to a roll-up plan at age 80.

Sales director Jon Tweed says: “We’ve moved closer to the residential mortgage market and I know some residential lenders are considering similar hybrid products.

“We are aware that pension income can be one of the safest means of meeting mortgage repayments, although gathering information from a lot of different pension pots may seem like an administrative hassle to the large residential lenders. Hybrid products in the middle ground are the future, whether provided by residential mortgage lenders or equity release providers. The advantage of a hybrid is that there is no cliff-edge term end.”

It will be intriguing to observe whether the major standard mortgage lenders seek to diversify into offering equity release, either by acquisition or by developing their own products. It could be a more viable solution than significantly increasing the ages to which they grant standard mortgages by radically overhauling their systems or introducing an element of manual underwriting. Doing either would add to their costs and they could struggle to prove as cost-effective in this area as the smaller building societies.

Right Mortgage & Protection Network managing director Adam Stretton says: “The big banks are definitely missing a trick and need to start looking at hybrid products that offer a standard mortgage until people retire and then switch to some form of equity release. It wouldn’t surprise me if one of them came out with something like this.”

Santander could make the first move. Its UK head of business development for mortgages, Graham Sellar, says: “We are continually reviewing the market and looking at opportunities to provide an equity release product for maturing customers.

“I think that once borrowers get past 75, that segment is largely for equity release.”

Building societies hold the cards

Jenkins

Dick Jenkins, chief executive of Bath Building Society and incoming chairman of the Building Societies Association

It seems only a couple of years ago that nobody was interested in lending to older people. It was a market that looked to be the steadily growing preserve of specialist equity release providers.

But all that is changing and 2015 is the year in which lending in retirement has marched up the agenda of many lenders to become the topic du jour.

The mortgage market is simply more competitive than it was a year or two ago and lending into retirement seems a promising place for lenders to attract new customers at higher margins. Demographics also come into the equation as the post-Second World War babies are now coming into retirement.

Older people want more choices than the previous generation of pensioners had. They are fitter, smarter and more demanding. Many are looking to finance in their Third Age – what I have heard described as “adventure before dementia”. If you doubt that, ask Harley-Davidson and the Fender guitar guys who their biggest customers are these days.

Of course, the older age groups are far from being homogenous. There are niches within niches and lenders will inevitably design products and solutions that will appeal to certain subgroups of the retired population.

Some subgroups, such as people with bags of equity and plenty of retirement income, will become crowded spaces while others, such as those with higher LTVs who come to the end of an interest-only mortgage at retirement age, may find fewer options available. And there is a world of difference between lending into and lending in retirement.

But such is the variety among older people and their reasons for wanting to borrow, and such is the duty to treat this group of customers with great care, that this segment is going to be difficult for the largest lenders to service with their highly efficient factory-driven systems and processes.

This is a space in which the smaller, bespoke lender will be able to provide a level of service that older people want and, frankly, need.

The FCA, understandably, will be on the lookout to make sure that lenders treat older borrowers fairly, especially those who could be defined as “vulnerable”. There is no shortage of conduct risk bear traps for the unwary and, of course, servicing older customers presents interesting challenges too.

Older customers also want a brand they can trust. They prize lenders that share their values and have been around for a long time.

Building societies tick all of these boxes and, as the incoming chairman of the Building Societies Association, I will be very keen to make sure that building societies position themselves as the obvious lenders to develop and serve this market. 

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  • Carl McGovern 21st August 2015 at 1:09 pm

    I have stated for a while that the big lenders inflexible approach to lending beyond age 75 is pretty unreasonable. I have had plenty of success placing cases to age 85 with the smaller lenders, the most recent of which was yesterday. The biggest farce on this in my view is when we have a joint application and the age limit is applied to the older person. If the younger applicant fits on their sole income, how can this make any sense?

    Hopefully Realeconomic has been sorted, as despite the decline you have mentioned, I am sure a small lender will happily accept your case.

  • Realeconomic 17th August 2015 at 1:49 pm

    Grey haired underwriter – (me grey haired COO) all you have said, in great detail, is true. And the point is if you underwrite the circumstances in detail, the age becomes immaterial not the sole determinant. I was declined at 5 % LTV, pension income of twice the loan amount, life insurance 3 times the loan amount. Not too much of a risk but I was 70 so ‘the computer says no!’

  • Chris Hulme 17th August 2015 at 12:23 pm

    Older borrowers are different yes but the criteria written and applied to borrowing into older ages are far from real world and the larger the lender the harder it is to allow underwriter freedom to make his own professional decision. Could this be the key reason why smaller [building] societies are better at this than most?

    I wonder whether on the back of the age issues raised above (mainly on longevity or working through health issues) lenders could see a suitably insured older borrower as a lower risk than an uninsured one…. perhaps this could have wider benefits across all ages of borrowers…. after all, yes its a gamble or a punt but if a borrower takes protective measures to reduce that risk (Life, CI, IP) should this be factored into underwriting decisions and possibly even pricing?

    The discussion will reign on… probably long after we have departed!!

  • Grey Haired Underwriter 17th August 2015 at 10:56 am

    Why is it that these articles have a tendency to avoid the basics? Lending is basically a gamble and a long term gamble at that. The lender takes a ‘punt’ as to whether to loan is affordable for the life of mortgage, whether the borrower will stay in employment for the life of a mortgage and that the borrower will stay in good health for the life of the mortgage. There is also a major gamble that there will be no other fundamental changes such as divorce or the death of a spouse. Any one of these factors that can lead to arrears and/or problems with the borrowers so a lender needs to look at the probability of them occurring.
    So applying them to the older borrower we can maybe accept that there is affordability for the life of the mortgage albeit that a pension may be halved on first death, we can assume that a couple who have been together for a few decades will stay together in their’ twilight’ years even though statistics are starting to refute this but as for the rest it is worth considering:
    1. Whether we like it or not there is still age discrimination by a number of employers and there is nothing that will change this. The Older borrower is Ok if they stay with their current employers but if they get made redundant or are out of work for other reasons they will take longer finding alternative employment and will quite often have to accept a lower salary.
    2. There is little doubt that as we get older we will start to suffer the aches and strains of life and whilst a lot of over 60s will be fine there is little doubt that the majority will start to develop the symptoms of old age, whether that is arthritis, high cholesterol, Diabetes or a general deterioration in physical well-being. Yes, we have a world where no one can be forced to retire but unfortunately physical well-being or lack thereof can dictate that the borrower has to retire a lot younger than they planned. I would also suggest that full physical or mental incapacity is more likely to happen with the older borrower.
    3. It is also a plain fact that someone over 60 has a higher probability of dying within the next 25 years than someone of 40. (60 may be the new 40 for a lot of people but death statistics say that it isn’t). It is also the case that a 40 year old can get reasonably priced health and death cover that would otherwise be prohibitively expensive for a 60+ applicant. So in truth a lot of lenders should know that in a best case scenario their loans will end up with a Grant of Probate (that can take over 6 months even on a simple estate), or worse that someone has to start seeking Letters of Administration or even worse that the lender faces up to having an elderly spouse in a worse financial situation and who can’t afford the loan.
    You cannot statistically say that older borrowers are the same as any other, nor can you use the fixed income situation or the potentially higher equity share as the reasons to lend to them. Let’s start to understand the realities of lending to older people and stop the naïve approach. There are a lot of discussions to be had and these have to face the facts not simply address the ‘nicey-nicey’ approach

  • Chris Hulme 10th August 2015 at 5:04 pm

    MMR and Regulation gets the blame a lot from policy makers and lenders and this policy line is used far too often as a reason NOT to lend….

    It’s an interesting one of trying to alleviate a client being protected from POSSIBLE financial hardship in the future…. The issues are that some people are in ACTUAL financial hardship NOW that need some leeway on term to deal with the CURRENT hardship scenario which can then better the financial position by the time they retire in 15 years time….

    Down side is policy isn’t written with that in mind…. its written with the Ombudsman and the FSCS in mind while the lawyers sharpen their cutlasses outside the door.

    No matter what decision are made on age, term, retirement…. as long as the industry is an open cheque book for challenges based on hindsight, we’ll be damned if we do and damned if we don’t. The HSBC case is proof of that!

  • Realeconomic 7th August 2015 at 4:38 pm

    after the FOS decision on HSBC I imagine the are all looking at their criteria for assessing older borrowers (rather than imposing a limit based only on age, not on circumstances). I’ve reopened a Complaint, on this basis, that RBS rejected, to see what they say now.