Star letter: Get real on older borrowers
Earlier this month, Mortgage Strategy ran a feature on the problems with lending into retirement and why larger lenders were ignoring older borrowers.
Why is it that such 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 the loan is affordable for the life of the mortgage, whether the borrower will stay in employment for the life of the mortgage and whether they will remain 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 can lead to arrears and/or problems with the borrower, so a lender needs to look at the probability of them occurring.
So, in 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 the first death; and 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 nothing will change this.
The older borrower is OK if they stay with their current employer 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 while many over-60s will be fine, the majority will start to develop the symptoms of old age, whether that is arthritis, high cholesterol, diabetes or a general deterioration in physical wellbeing.
Yes, we have a world where no one can be forced to retire but, unfortunately, physical wellbeing or lack thereof can dictate whether 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 aged 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-plus 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 more than six months on even a simple estate); or worse, that someone will have to start seeking letters of administration; or worse still, that they will have to deal with an elderly spouse in a more dire financial situation, who cannot 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 reason to lend to them.
Let us start to understand the realities of lending to older people and stop the naive outlook.
There are a lot of discussions that need to be had and these have to face the facts – not simply take the ‘nicey-nicey’ approach.
Long mortgage terms are not as cheap as they look
Recent research by Mortgage Advice Bureau and Twenty7Tec claimed there was a spike in the number of borrowers searching on comparison sites for mortgages with terms of 30 years or more.
But while clients who go direct on comparison websites may see the longer term as a lower-cost option, this certainly will not be the case with any client who seeks professional advice.
Our experience is that a longer mortgage term is the negative by-product of tighter affordability models. We regularly see scenarios where we agree a target budget with clients that they feel is comfortable and affordable against which we recommend a term that is as short as possible within the clients’ own budget.
The downside is that, on some occasions, the affordability models deem such an outgoing as unaffordable, therefore pushing the clients to take a longer term to meet the affordability model of a lender offering the most cost-effective rate/fee balance for their loan amount.
Chris Hulme, Clayton Hulme