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Cover story: Is all that glitters gold in lending for older borrowers?

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Many big lenders are rethinking lending criteria for older borrowers but experts believe that headlines may be masking unachievable requirements and lenders should be doing more

A recent move by resi­den­tial mortgage lenders to increase upper age limits has been – rightly – wel­comed by the market. Many big lenders tightened their lending criteria after the credit crunch but, as the UK’s population ages, and many choose to buy a house later than previous generations, having restrictive mortgage lending age caps is clearly not in the best interests of older borrowers.

But concerns remain that, while publicity around increasing upper lending ages makes lenders look good, it also diverts attention away from underlying and unfixed issues that still restrict older borrowers. So is simply increasing upper age limits enough? Are lenders’ other criteria holding back lending to older borrowers? And what more do lenders need to do to help?

Experts say larger lenders need to do more, particularly around interest-only lending, criteria changes and affordability pressures for pensioners, and also need to move away from treating upper age limit tweaks as a cure-all.

“Of course we have seen some age limits increase, which is a step in the right direction, but the criteria behind the headlines also need to be changed,” says John Charcol senior technical director Ray Boulger.

Interest only
The first area where elderly borrowers are still being held back is interest-only lending, Boulger says.

He says: “When it comes to interest-only lending for older borrowers, some restrictions
are applied by the big lenders – there is too much of a focus on the ‘computer says no’ approach, while for that demographic there are a lot more variables to consider and a range of income sources.”

One issue is that most larger lenders do not accept selling a house as a repayment strategy for interest-only mortgages, he says.

With many older borrowers keen to downsize to a smaller home, or move into a retirement home, this restricts the options available.

Trinity Financial director Aaron Strutt agrees the interest-only market needs an overhaul to help older borrowers.

He says: “When I started 10 or 15 years ago, sale of the property as a repayment vehicle was a lot more common. People used to select that as their repayment vehicle. We are getting to that stage for older borrowers where more needs to be done to help them when they come to the end of their term. There is real concern about what is going to happen.”

Boulger says: “The FCA requires borrowers to have a credible repayment strategy, as of course they should, but the sale of a property should be considered as one.”

Criteria
Mainstream lenders are also conservative when it comes to lending criteria other than age limits.

For example, Nationwide increased its residential upper age limit to 85 in July 2016, well above the norm for most big lenders.

However, the change applied only to the lender’s standard residential mortgages, had a maximum loan size capped at £150,000 and had a maximum LTV of 60 per cent.

Another example is Santander, which increased its upper age limit for interest-only lending from 65 to 70 in early February.

But Boulger says the lender could still do more to help older borrowers. He says: “Santander’s announcement that they’ve upped the age limit for interest-only borrowers is great, but they also need to change their criteria. They still require £150,000 minimum equity in the property, which should be more flexible for those not looking to trade down.

“The fact they have an interest-only product is a positive but they need to go further.”

London & Country Mortgages associate director David Hollingworth says: “These things are not exactly throwing open the doors to welcome older borrowers. But the difficulty for lenders is they have to tread the right line between pro­viding more flexible criteria to offer something to those who want to use a standard mortgage in later life, but doing that in a responsible way.

“The flip side to people saying this sort of thing is ageist is that you are lending to more vulnerable borrowers. Lenders have to walk that tightrope. But there is still more that can be done.”

Chadney Bulgin mortgage partner Jonathan Clark says many lenders have reacted slowly to the increasing need for mortgages to suit older borrowers, so any relaxation of criteria is a good thing.

But he adds: “However, a lot more could be done to avoid these clients being unnecessarily forced into ‘hybrid’ or even full-blown equity release-type mortgages that, as we all know, can trigger some very generous procuration fees for brokers happy to service this market.”

Pension freedoms
Another issue for older borrowers is a clash between tighter affordability checks required by the 2014 Mortgage Market Review and the greater flexibility around pension pots brought in by the pension freedoms in April 2015.

The pension freedoms gave older savers the option not to buy an annuity and the choice to spend their pension pot however they liked after age 55.

But mortgage lenders were unprepared for the move, and have still not caught up, leaving many older borrowers struggling to qualify for a mortgage into retirement.

The problem is many pensioners are choosing to draw down their pots, leaving their money invested and taking out cash gradually over time.

But from a lending perspective this presents a greater affordability risk than the highly predictable income given by an annuity.

The problem is worsened by many employers scrapping final salary pension schemes, which also gave a very predictable guaranteed income to retirees.

Both lending trade bodies say pension freedoms are an issue when it comes to lending to older borrowers.

Council of Mortgage Lenders spokesman Bernard Clarke says: “Pension liberalisation has widened choice, but the individual circumstances of older borrowers can vary considerably. That can make it even more difficult for older people – and those advising them – to work out the best options.”

Building Societies Association head of mortgage policy Paul Broadhead says: “Lenders are generally quite comfortable lending against an annuity or a defined benefit pension, but what about a borrower who plans to keep their pension invested?”

Boulger says: “Most big lenders haven’t adapted to the new environment for older borrowers since the pension changes came in.

“These came in just after the credit crunch when lenders were not looking to make any adjustments; they have been slow to adapt and improve their products for older borrowers since tightening restrictions post crunch.”

Upper age limits
Despite the praise heaped on larger lenders for raising their age limits, the fact these exist at all can be an issue for older borrowers.

The BSA says that, excluding Halifax, most banks stop lending to borrowers past 75 years of age.

A BSA spokeswoman says: “These often have the effect of hard stops in practice which, to a degree, make other lending criteria irrelevant.”

Coreco director Andrew Montlake says lenders should start to move beyond having age caps at all.

He says: “I don’t think age should come into the equation. We’ve moved into an era where it’s about affordability, and that should not be governed by age. If affordability is genuinely governed by age for whatever reason, then of course that has to be taken into account. But lenders have to have a cut-off somewhere, and the question is, where is that?”

Montlake says mainstream lenders are reluctant to raise their upper age limits too far because the patriarchal nature of UK society means most older households have one breadwinner, almost always male. When that person dies, generally leaving a living female partner, it can cause problems for both the lender seeking to recover its money and any surviving partner and family.

Montlake adds: “It’s about lenders trying to be more realistic than just shoving the age up by five years and saying ‘Look, we’ve done a great thing.’ But you do have to take into account all the potential issues that there may be.”

As one anonymous lender executive told Mortgage Strategy: “The problem is, they keep dying.”

Help at hand
So what does the future hold for older borrowers? First, while still underserved by big lenders, this sector is well served by building societies.

Thirty-three building societies will lend past 80, with 14 of those having no upper age limits at all, including Bath, Buckinghamshire, Cambridge and National Counties.

But Darlington Building Society chief executive Colin Fyfe says: “No responsible lender will wish to have a ‘maturity conversation’ with a customer who has no way of repaying their mortgage other than selling their main home.

“As an industry we need to be alert to the conduct risks and ensure our communications are clear and give customers choices that do not place a significant risk burden on them.”

But for the mainstream market, help is on the way. Following the BSA’s Lending Into Retirement report, published in November 2015, the trade body has set up a working group to further tackle the issue of lending to older borrowers.

The group includes the CML, the Treasury, the Financial Conduct Authority and Age UK, among others, and is chaired by Broadhead.

A priority for the group is to look at affordability assessments for older borrowers, especially relating to pension freedoms.

The BSA is also funding research by the International Longevity Centre into the older borrower market and how it may change in the future. It will be published in May.

A BSA spokeswoman says: “To a large degree some of these big-ticket items need to be grappled with to set the scene for more detailed lending criteria to be considered.”

The CML has also commissioned its own research into the issue.

Clarke says: “To try to improve our understanding of this, we are commissioning new research, due to be published later this spring, looking into demand for advice and guidance for older borrowers; its availability; differences between customers; and how product suppliers position themselves in the market.

“The research will also consider the experiences and outcomes for customers, and try to identify the lessons that might be learned. Finally, we will look at what could be done to improve the provision of advice and the way in which the market works for older customers.”

When it comes to lending to older borrowers, the mortgage market has done much to help through measures including increasing upper age limits. But it is clear more needs to be done to help resolve the issue.

The lending trade bodies and the regulator are on the case, and the future looks promising for older borrowers. But in the here and now, older borrowers are still getting a rough deal from many lenders.

Building societies are helping to ease the issue but, with the top five residential lenders controlling around 65 per cent of the market, and the top 10 around 85 per cent, changing the actions of a few could help the fortunes of many.

CML research into advice and guidance issues

ClarkeBernard Clarke

Spokesman
Council of Mortgage Lenders

We’ve done a lot of work over the past couple of years to try to find out more about what prevents older people from having wider choices in the market.

At the same time, lenders have responded positively by bringing out new products and reviewing their approach to older customers.

Pension liberalisation has also widened choice, but the individual circumstances of older borrowers can vary considerably. That can make it even more difficult for older people – and those advising them – to work out the best options.

One problem is that only a relatively small number of advisers are able to help older borrowers with residential and lifetime mortgages, while also offering financial advice.

Financial advice can become compartmentalised, with advisers supervised under different regulatory regimes for different activities. This can be reinforced by the way in which product distribution evolves over time.

To try to improve our understanding of this, we are commissioning new research, due to be published later this spring, looking into demand for advice and guidance for older borrowers; its availability; differences between customers; and how product suppliers position themselves in the market. The research will also consider the experiences and outcomes for customers, and try to identify the lessons that might be learned.

Finally, we will look at what could be done to improve the provision of advice and the way in which the market works for older customers.

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