The Bank of England has delivered its first rate cut in more than four years and specialist later life lending advisers are reporting a rise in enquiries, giving real reasons for optimism that the market is recovering.
Inside the industry, long-term confidence that the lifetime mortgage sector will bounce back has never gone away and lenders and advisers have worked hard to ensure that once consumer confidence returns, the market is ready to meet what is likely to be a considerable increase in demand. A lot has been achieved in terms of new product innovation and the evolution of advice processes and philosophies but more needs to be done.
We can point to the strong foundations of a broader later life lending market incorporating retirement interest-only (RIO) mortgages, term interest-only (TIO) products and increasingly flexible mainstream options aimed at older borrowers. This market is valued at around £50bn per annum and is growing in importance as homeowners take out their first mortgage later and for an extended term.
Customers increasingly struggle with saving into a pension while buying a house and paying a mortgage. That means many in later life have limited retirement savings and significant mortgage debt. This conundrum is not straightforward to solve but viewing the home as an asset to help fund later life has to be part of the answer.
Analysis of Financial Conduct Authority (FCA) data shows the number of older first-time buyers is rising – between 2018 and 2022 there was a 29% increase in the number of first-time buyers in their 50s. UK Finance reports that over 60% of new mortgage borrowing extends beyond the borrowers’ 65th birthday.
These societal changes and the evolving wants and needs of customers have driven innovation.
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But distributors need to change their approach if good customer outcomes are to be consistently delivered in line with Consumer Duty. Currently too many advisers are failing to seize the commercial opportunity in the sector, customers are not being properly served and the lifetime mortgage market is struggling to achieve its true potential.
Later life lending products are changing
Lifetime mortgage lenders have tackled the need for innovative new products by offering higher loan to values (LTVs), shorter early redemption charges and increased flexibility around regular payment options. Modern lifetime mortgages are a suitable option for a significant percentage of over-50s customers enabling them to actively manage their borrowing as circumstances change.
One particular product innovation to highlight is payment term lifetime mortgages.
They require some mandatory repayments to be made for a period in return for the customer being able to borrow more than through a traditional lifetime mortgage and/or at a lower rate. The products are designed to evolve with borrowers as they move into retirement, offering the option to eventually transition into a full roll-up product offering a fixed interest rate for life and certainty of tenure once the mandatory payment terms have been met.
They meet the needs of people stuck on expensive standard variable rate (SVR) mortgages due to affordability challenges or those worried about kicking the can down the road through a product transfer.
Later life lending advice is changing
Mainstream mortgage brokers need to embrace how the later life market has changed. Consumer Duty requires them to look at all options, even if they extend beyond the services they offer, and advisers need to think more holistically.
Affordability needs to be approached not simply from a pass or fail standpoint but on how much a customer should or wants to pay and how this may vary over time. The products to support this approach are already available and advisers need to catch up.
Equity release specialists need to up their game in terms of considering all alternatives. Product innovation in the later life sector includes RIOs, TIOs, long-term fixed rate products and other mainstream solutions.
All lifetime mortgages are not the same.
The benefits from a cost of borrowing perspective around making some element of repayment or identifying health/lifestyle factors can be significant. Advisers must have comprehensive conversations with their customers and should ensure their research processes and sourcing tools look beyond simple roll-up products.
Independent financial advisers, wealth managers and even workplace pension providers should be considering property within accumulation and decumulation strategies. These advisers need to look beyond their own silo and commercial interests and consider how to support customers in achieving their goals through different life phases given all the assets and liabilities they need to manage.
Few advisers can be experts across all parts of the mortgage market, let alone combine mortgage, investment and pension advice. However, it is realistic to expect advisers to adopt a broader view and to ensure trusted referral arrangements are in place.
Progress has been made but the journey has just started
The later life lending market has come a long way in terms of product innovation and the evolution of the advice approach. Specialist equity release businesses have adapted their business models to weather economic pressures and fit the regulatory environment.
The mainstream mortgage market and other segments of the intermediary landscape need to evolve even more quickly to suit to the structural changes in society and customer needs.
A helpful step forward would be an explicit acknowledgement from the FCA that the old expectation, under the 2014 Mortgage Market Review, that most customers will have repaid mortgages by retirement, is just not viable in today’s economic climate.
The key question should be how the industry can support customers with the challenge of financing retirement while funding mortgage debt. A strong later life lending market should be a high priority particularly given how much property wealth can contribute to retirement planning.
Ideas for a better functioning market would include residential property wealth being included as part of guidance services such as Pension Wise and within workplace retirement planning propositions. The silos between mainstream and equity release advice which are reinforced through regulatory rules, qualification regimes and standards issued by trade bodies should be reviewed and challenged in the context of the barriers they create in terms of access for consumers, and good outcomes, versus the risks.
The later life lending industry has to commit to continued innovation with a focus on hybrid solutions that fill the middle ground between equity release and mainstream mortgages. It is reasonable to conclude that looking forward, a high percentage of customers should fit in this middle ground. They are likely to have mortgage debt in retirement but are willing to service some or all the interest for some time.
Rather than being seen as a niche within a niche this is a product option that needs to be embraced by all.
The foundations for a strong later life lending market are in place and confidence is growing again. But we need more ambition, bravery, and creative thinking from all stakeholders if the sector is to achieve its full potential.
Accepting the status quo will result in poorly served customers and unmet societal needs.
