Lenders are actively looking at how to help older people with their mortgage needs. A few lenders have no upper age limit now and some will lend up to age 85. Michelle Niziol, founder and managing director of Independent Mortgage Solutions, looks at the options
As a society, we are generally ageing, individually living longer, working very differently, witnessing higher house prices, facing a variety of loans and debts, and becoming ever more mobile.
This is a potent mix, and, though the problems of borrowing into retirement are often overstated, the mortgage market has been relatively slow to respond to fluctuating needs. Happily, this is changing, and recent reform in mortgage regulation is easing the situation as lenders adjust and compete.
A silvery haired revolution
A complex and evolving set of circumstances present fresh challenges in lifestyle, healthcare, location, employment, dependency, housing and financial services for us all. In particular, for the residential mortgage market, the following factors affect both borrowing and lending communities:
- Over the next 20 years the proportion of the population over the age of 65 will rise to around a quarter.
- Polls suggest that about half of us want to work beyond 65.
- The very nature of retirement is transforming, becoming more of a process than an event.
- People are buying homes later in life and needing to borrow for longer.
- Rising rates of divorce mean that more people need recourse to mortgage finance all over again.
- Demands on the ‘Bank of Mum and Dad’ are becoming more prevalent and pressing.
- Equity release, for a variety of reasons, is gaining in popularity, reaching record levels last year.
- House prices, in real terms, have more than doubled over the past 20 years.
- Pent-up demand for home ownership in later life exists with lower levels of younger owner occupation.
- The tendency to ‘right sizing’ and ‘last-time buyers’ is evident.
All this conspires to make the mortgage market increasingly aware of a new era of much less well-defined life stages and pensions landscape.
What is retirement borrowing?
At its simplest, lending to older borrowers can be divided into two distinct forms of borrowing: borrowing into retirement; and borrowing in retirement. In the former, there are borrowers who will still be repaying their mortgage after they have reached retirement age or retired from work. In the latter, with which this piece is concerned, there are borrowers seeking new mortgage finance when already retired or semi-retired.
Nevertheless, it should be appreciated that whilst over a third of new mortgages being taken out today will extend beyond the borrowers 65th birthday, less than 1% of all new lending is to the 65 and over age group; though demographic trends mean that there is an accelerating potential market for older people.
Normally, the expression ‘retirement’ refers to the age at which the prospective borrower starts to draw their pension. Practices between building societies vary however, with some accepting borrowers beyond the state pension age of 65. Similarly, some lend solely on pension income, while others take a broader view of affordability. Understandably, the two prime determinants of affordability throughout remain ‘income’ and ‘equity’.
In terms of age and income, prospective borrowers who have either purchased an annuity, or are on a direct benefit pension scheme, receiving a stable, secure and regular income, make underwriting a mortgage fairly clear and straightforward.
But the lender will still consider the increased risk of mortality or need for special care over the term of the mortgage for this age group. With the proposed cap of care costs being postponed until 2020 this will remain a significant risk.
Equity release
Equity release may be a more attractive option to the older borrower, asset rich but income poor, who experience difficulties in obtaining traditional mortgage finance.
Members of the Equity Release Council (the trade body for equity release providers) operate a ‘no negative equity guarantee’, meaning that the amount of debt will, at least, be capped by the value of the home. So, even if your house falls in value and the sale cannot cover the loan, you (or your beneficiaries) will not be liable for the shortfall as it will be written off.
For those interested in finding out how much equity they might be able to release from their home with such products as a lifetime mortgage, there are now a whole range of equity release calculators accessible on the internet. These should be used as a guide only, and more informed advice sought once interest is aroused.
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Situations and scenarios for older borrowers
Over the past year or so we have encountered a variety of circumstances and cases where older people have sought mortgage loans. These included:
- Downsizing – especially upon retirement, loss of income or bereavement.
- Second homes – for a better quality of life.
- Home improvement – both extension and adaption.
- Debt consolidation – paying-off unsecured loans.
- Early or semi-retirement – securing an adequate income to reduce working commitments.
- Family support – helping children onto the housing ladder.
- Investing elsewhere – especially in the buy-to-let market.
- Advance relocation – either geographically more attractive or physically more manageable.
- Disposal dispute – often related to previously inherited property where borrowers, sometimes siblings, cannot agree.
- Health conditions – requently consequent upon age-related illness.
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Where are we now?
Arguably, borrowing into retirement has become one of the most contentious issues in the residential lending market since the regulatory framework was changed by the Mortgage Market Review in 2014.
Mixed messages are being received regarding the future direction of retirement borrowing depending upon circumstances and source, but the elements featured below can be discerned.
- The number and proportion of borrowers paying-off their mortgage beyond retirement continues to rise, as does the tally of fresh loans to the over 65s.
- The constraints set by the regulatory authorities – the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) – actual or perceived, inhibit lenders.
- Simultaneously, the same bodies want lenders to develop products better suited to the desires of older borrowers.
- There is recognition of the need for such new products bridging the gap between traditional mortgages and lifetime loans, with the consequent emergence of a number of new specialist financial services firms.
- Currently, there is an examination being conducted by the Council of Mortgage Lenders on the possible conflict for lenders between the FCA’s demand for firms to take a “proportionate and common sense approach” to lending to older borrowers and the conservative capital requirements imposed on them by the PRA. Hence the mixed messages.
- Further uncertainty is injected by recent reforms to pension policy. The effect of pension reform will not be the same for all prospective borrowers, but allowing individuals to draw down their pension funds inevitably will have an impact on the lending industry – and also on the specialised retirement housing market.
- Generally, an increasing awareness of the benefits and availability of ‘lifetime mortgages’ where borrowers want to draw down an income from housing equity to fund such matters as housing adaption, family support, social care or simply additional income, where outstanding loan capital is paid on death or entering full-time care.
- Loan-to-value ratios are frequently lower than traditional mortgages, often around 25% to 30%.
- Affordability checks, coupled with rigorous stress tests are invariably conducted.
- Health, capacity and longevity are prime determinants in assessing financial vulnerability given the possibility of: developing such conditions as dementia; the unknown implications of care costs; and the affordability issues surrounding the death of one partner in joint borrowing.
Case study
One case, which meant a lot to me personally, concerned a couple who came to see us with an existing interest-only mortgage that was due to end in two years’ time. The lender would not allow the mortgage to be converted to a repayment loan or be extended due to their new affordability calculations. As you can imagine, the couple were distraught and naturally worried, so came to me seeking help and advice.
The clients treasured their house and did not feel ready to downsize. She was 63 and he was 65. She was not yet receiving a state pension, he was. And in addition to his state pension, he had both a civil service pension and a police pension.
Using pension income only, I was able to convert the mortgage to a repayment which enabled them to remain in their property. As their monthly income was sustainable I was not putting the client in financial jeopardy.
To conclude, I fixed the mortgage for five years as the clients future intention was to sell their property and downsize which would result in them being mortgage free. Everyone’s end goal I am sure.
Conclusion
It should be appreciated by all parties concerned than lending and borrowing into retirement is not necessarily riskier – just different. However, whilst there is a wealth of information for would-be first-time buyers, the lending market does seem to become more confusing with age. This is changing – but somewhat slowly.
There remains a need for more joined-up thinking across the board and the development of more flexible transition products between mainstream mortgages and lifetime products. In the meantime, we continue to monitor closely the market itself, the players involved and the rules of the game.
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Building societies lead the way in scrapping upper age limit for borrowers
Cambridge Building Society and Dudley Building Society are the latest lenders to remove upper age limits on both residential and buy-to-let mortgages.
Customers who are assessed as able to make repayments will be considered for a mortgage regardless of how old they will be at the end of the term.
The Cambridge already had generous lending age limits in place with a residential age limit of 75 and an 85-year-old limit on buy-to-let mortgages.
Underwriting manager at The Cambridge, Louise Goullée, said: “With a manual underwriting process it’s much easier for us to assess applications on an individual basis. We’ve been working towards removing upper age limits for some time so it’s great to make this a reality.
“We look at each application individually so there’s no reason for age to be a specific barrier to getting a mortgage, remortgaging to release equity or moving into the buy-to-let market.”
Dudley Building Society has also scrapped all upper age restrictions across its entire product range.
Jonathan Moore, head of credit at Dudley Building Society, said: “For too long, older borrowers have struggled to find mortgage availability, and those options which did exist generally treated these borrowers as second class citizens by forcing them to borrow from a limited range.
“We consider all borrowers to be equally worthy of consideration, and by making our entire range available, we will demonstrate that we do not discriminate by age.”
BSA
The Building Societies Association published an interim report on Lending into Retirement in November 2015, which contained nine recommendations for lenders to consider, including reviewing the maximum age policies on mortgages.
Paul Broadhead, head of mortgage policy at the BSA, commented: “It is encouraging to see The Cambridge and a number of other societies reacting positively and flexibly to this change. It is clear that building societies continue to lead the way in serving a broad spectrum of borrowers’ needs.”
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Michelle Niziol is the founder and managing director of IMS (Independent Mortgage Solutions) based in Bicester. She has been an independent mortgage broker for 10 years in and around Oxfordshire and Buckinghamshire.
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