Lending to older borrowers has proved challenging in recent years. There has been no shortage of appetite from retired homeowners, many of whom find themselves coming to the end of an interest-only mortgage without any means of repaying the loan. However, despite an increase in demand, the supply of suitable lending products for this market has remained stubbornly low.
Speaking at a recent Mortgage Strategy roundtable event, Secure Trust Bank managing director of mortgages Esther Morley said the current regulatory landscape was one of the main causes of this imbalance.
The FCA tightened its lending guidelines in response to the banking crisis and this has dissuaded many providers — mainstream banks in particular — from lending to retirees.
Morley explained: “One of the biggest problems has been the fear factor. Lenders are concerned about how they can verify income post retirement, and are unsure just what the regulator will and will not accept in terms of income.”
This situation hasn’t been improved by the new pension freedom rules, she added.
“It is relatively straightforward to assess affordability using a company pension or annuity payment. But pension freedoms give people the option of taking additional lump-sum payments out of these pension funds, so lenders can’t even rely on this income stream being there in future.
“This has made it far harder to assess the affordability of a loan in retirement.”
One of the biggest problems has been the fear factor
However, John Charcol senior technical director Ray Boulger pointed out that, while pension freedoms were causing short-term difficulties for lenders and brokers, in terms of assessing affordability these reforms might help resolve some of the other problems in this market over time.
Key Retirement chief product officer Dean Mirfin noted that many older borrowers encountered difficulties with affordability. “We can arrange a mortgage deal for only around one in 10 of those who come to us,” he said.
One of the main problems, Mirfin added, arose with couples, where the lender deemed the mortgage to be unaffordable should one of them die. However, Boulger thought the pension freedoms might alleviate this problem.
“Typically it’s been the man who has had the larger pension but has been statistically likely to die first, leaving the surviving spouse with a lower income, which can affect affordability,” he said.
“But if people choose to keep pension funds invested then the balance can be passed on to the surviving spouse. It ceases to be a problem of who will die first.”
Nevertheless, Boulger acknowledged that lenders would face an “interesting challenge” in assessing affordability based on these pension funds.
Questions around verification of affordability aren’t the only regulatory issue, according to Morley. Allied to this are lenders’ “justifiable concerns” about whether older borrowers fully understand the decisions they are making and their potential consequences later in life.
“Lenders have to take into account the conduct risk as well as the credit risk,” said Morley. “They don’t want to be in a position of evicting 80-year-olds. These are probably the two biggest concerns lenders will have about providing mortgages for those in retirement, particularly when the repayment is on sale of property.”
But these regulatory hurdles may be eased by the forthcoming consultation paper from the Financial Conduct Authority, which looks at how lenders can better serve the retirement market. Its recommendations are likely to make it easier to lend into this market, and to give greater guidance and support for brokers serving the sector.
Mirfin said: “It’s important to note that the FCA isn’t consulting on whether providers should lend to older borrowers; it is consulting on the best way to do this, so we should soon see some changes to the regulatory landscape.”
Boulger added that such changes were long overdue.
“It is surprising the regulator has taken so long to address this issue given part of its remit is to help consumers. The FCA is behind the curve here. It is understandable that the industry tightened lending criteria back in 2008 but providers are now looking to widen them again and it’s the regulator that’s holding them back.”
Boulger said the industry wasn’t looking to return to the ‘no holds barred’ pre-credit crisis days, but instead was seeking to provide prudent but flexible mortgage products that met a genuine need.
Lenders have to take into account the conduct risk as well as the credit risk
It is important for providers to review their lending criteria rather than simply extend the age to which they are prepared to lend, he said. The key is getting these criteria right but lenders and the regulator have different perspectives on where risk lies.
Boulger said: “From a lender’s point of view, loan-to-value is clearly one of the main issues; but, from the regulator’s point of view, affordability is key.
“A lender may say: ‘The affordability is a bit stretched but it’s only a 50 per cent LTV so we are quite happy with that as we’re unlikely to lose money on the deal.’
“But the regulator won’t necessarily take the same view. It would be happier if the loan met stricter affordability criteria, even if it was a 95 per cent LTV, which lenders might be less comfortable with.”
Mirfin added that, as well as tackling this issue, he hoped the consultation would enable lenders to provide better long-term solutions for older borrowers.
“At the moment, we are seeing a lot of lenders simply roll over interest-only mortgages past maturity. This is a short-term fix and is still leaving borrowers in the same basic position.”
Research in May by the Council of Mortgage Lenders showed there was legal action on only around 1 per cent of these mortgages, Mirfin added. But the research didn’t reveal how many interest-only mortgages were “effectively in limbo” and had simply been rolled over past maturity without a longer-term solution or structure being put in place.
The panel noted also that the two main regulators — the FCA and the Prudential Regulatory Authority — can seem to be pulling in different directions, which has made it harder for many providers to lend into this market.
For example, PRA rules require banks to hold additional capital if they offer longer-term fixed-rate mortgage deals. Often in retirement, however, individuals on fixed income prefer the security of a fixed-term deal where they know the interest rate will not shoot up.
Boulger said: “There’s a mismatch in what the FCA is trying to achieve in helping the consumer and what the PRA is trying to achieve in terms of macro-prudential risks, which can appear to work against ordinary borrowers.”
Currently it’s possible to get a lifetime mortgage at a fixed rate of below 4 per cent, and Boulger said: “These lifetime mortgage deals have a ‘no negative equity’ guarantee and many have the facility to make overpayments. Given this, you’d expect mainstream lenders to be able to offer 30- or 40-year fixed-term mortgages at around the 3.5 per cent mark as there’s no guarantee and borrowers are making interest payments. But this doesn’t seem to be happening at the moment.”
Morley noted that this discrepancy between mainstream and lifetime mortgages was due mainly to the way the different lenders were funded, with lifetime mortgages often matched against pension liabilities, for example.
According to Coreco director Andrew Montlake, one of the key problems in the sector is this separation between mainstream mortgage lending and what is seen as the equity release market.
He said: “Consumers don’t necessarily make these distinctions; they just want a lending solution that enables them to stay in their own home. But, depending on whether they see a mortgage broker or an equity release specialist, they can come away with two very different product recommendations. That doesn’t feel right.”
It’s important to let people know there are mortgage deals out there
Mortgage adviser qualifications should be both better quality and wider ranging, to cover all aspects of this sector, Montlake said.
“Mortgage brokers don’t necessarily need to advise on all these products but they need enough product knowledge to know when another type of product — such as a lifetime mortgage — may be more suitable, and refer the client to an appropriate company.”
Key Retirement takes this twin-track approach already, according to Mirfin. “Whether people come to us about an equity release or mainstream lending, the process is very similar. We explore what’s likely to be the most viable option for their circumstances; it may be, in some cases, a combination of the two.”
He added that, while not all mortgage brokers could be expected to offer advice on lifetime mortgages, a more rounded product knowledge would help.
“There’s a real fear among some firms that, if they talk about products they are not qualified to advise on, this is risky. But I think a basic product knowledge — for example, knowing which LTVs apply on lifetime mortgages at different ages — can help them provide a better service.”
Boulger thought this principle applied not just to lending to older borrowers. “I’d like to see a more general mortgage broking exam that includes first and second charge mortgages as well as lifetime mortgages,” he said.
Montlake noted: “It would help if there was better financial education among the public; there is a lot of misinformation. As an industry, we need to start talking more about what we do and how to get this information out there.
“A lot of people hit age 55 and assume no one will lend to them. So they get worried but don’t do anything about it. And the nearer the mortgage gets to its maturity date the more difficult it can be to find a solution.”
He added: “Yes, the market is challenging. But it’s important to let people know there are mortgage deals out there.
“I recently arranged a 25-year interest-only mortgage for a 72-year-old. Affordability can be a problem, particularly for those with little equity in their home. But I’m optimistic that this market will continue to improve.”