The positivity on later life lending from the FCA keeps on coming – up to a point – but more change is needed.
The past few weeks have seen the launch of the CP26/18: Mortgage rule review, aimed at supporting older borrowers as well as first-time buyers and underserved customers, and a speech by Emad Aladhal, the FCA's director of retail banking, at the Equity Release Council’s Later Life Lending Summit.
The CP26/18 consultation, which runs until late July, is another clear signal that later life lending is moving firmly from niche to norm and that mainstream mortgage advisers, irrespective of qualifications or scope of proposition, cannot ignore products such as retirement interest-only mortgages (RIOs) or lifetime mortgages if good outcomes for customers are to be achieved.
By outlining how follow-on products from interest-only mortgages such as RIOs and lifetime mortgages might be considered credible repayment strategies, the regulator is accepting that people will need to borrow into later life and that paying-off mortgage debt is not a realistic, or indeed optimal, objective for many.
Emad Aldhal’s speech highlighted that millions of consumers are not on track for achieving an adequate retirement income and argued that housing wealth should play a much more central role in later life financial planning.
With an estimated £4.3 trillion of housing equity available to support later life financial planning the speech made clear that later life lending products will be pivotal in helping to meet the challenges of the new retirement reality.
The speech specifically said that later life lending has the potential to become the fourth pillar in funding retirement while acknowledging that there is work to do to deliver on that ambition.
We can all agree on the potential and that there is work to do while having different views on what is needed to deliver on the ambition.
Delivering later life lending’s potential
Despite the demonstrable current and growing customer need the later life lending market is operating materially below its potential.
Currently 90% of mortgage customers over the age of 55 will either roll onto a product transfer with their existing lender or remortgage to a new one when their current product is due for review. Usually that will be another two or five year fixed rate deal.
In many cases that will be the right advice but far more than 10% would benefit from a specialist later life lending product such as a modern lifetime mortgage or RIO.
Many older borrowers - and particularly those with interest-only loans and no defined repayment strategy - are at risk of simply kicking the can down the road if they move on to another fixed rate deal.
Experience shows that is the case – customers in 2021/22 who took out five-year fixed rate deals are currently facing significant increases in monthly repayments as they remortgage which will have a material impact on lifestyle and other objectives at a time when living costs have soared. Taking out a lifetime mortgage in 2021/22, when a fixed rate for life at sub-3% could have been secured alongside the ability to maintain flexibility around repayments depending on prevailing circumstances, might have been a better bet.
Understanding later life lending
The likelihood, however, is that lifetime mortgages would not have even been considered in 2021/22 by mainstream mortgage brokers advising these customers. Little thought would have been given to the merits of these products in protecting against foreseeable harm through a longer-term and broader financial planning perspective, with instead the focus being on simply re-broking to the lowest rate on another standard mortgage.
Looking at advice recommendations with the benefit of hindsight can be dangerous, but the worry is that little has changed in the last five years. Advice processes and philosophies have not evolved with product innovation in later life lending, nor adjusted to the new realities of retirement faced by many customers.
The awareness and understanding of modern lifetime mortgages by mainstream mortgage brokers is lacking and even some of the messaging by the FCA remains confused.
In CP26/18 there is a reference which suggests “equity erosion” is an inherent part of lifetime mortgages and an implication that this is a negative in respect of equity release when compared to other options. The consultation paper claims that removing joint affordability guidance for RIOs could reduce the number of lifetime mortgage customers “and the equity erosion that comes with a lifetime mortgage”.
In fact, modern lifetime mortgages allow interest to be served in full, in part, or not at all. This flexibility of repayments alongside the protection of certainty of tenure is what makes these products more suitable for customers than RIOs in many circumstances but, of course, not all.
RIOs, for instance, have an important role to play when lifetime mortgage LTVs are insufficient to meet borrowing needs and this is where the proposed changes to the surviving spouse affordability test can be a positive in opening-up access for customers to a broader range of solutions.
The bigger picture is that positioning equity erosion as a negative flies in the face of the FCA’s ambition for property wealth to be the fourth pillar in retirement which surely means taking cash out of an asset.
Nobody talks about eroding pensions when customers convert the savings to an income – they are doing precisely what the product was designed for. When property equity is being used to support retirement income compound interest should not be positioned as a negative but instead simply a consequence of the financial planning strategy being pursued and something that needs to be understood by the customer.
The direction of travel being pursued by the regulator is positive but the language used in elements of CP26/18 needs to be reviewed and the sequencing of the changes proposed given careful consideration given the parallel work ongoing with the market study into later life lending and holistic advice.
It is difficult to understand how greater use of interest-only solutions, where later life lending products are the identified exit route, can support good outcomes unless mainstream mortgage advisers have a greater appreciation of the options available for older customers.
Indeed, for the intended journeys to work effectively all mainstream mortgage brokers should be required to advise across all later life lending products themselves or have robust referral relationships in place.
Furthermore, products such as lifetime mortgages cannot be regarded as a last resort for those over 55 and only considered once other options, including RIOs, have been exhausted. Mortgage advisers must take a broader perspective when it comes to older customers, not mistake affordability/eligibility for suitability and ensure all objectives and circumstances are taken into account when making a recommendation.
Holistic, joined-up advice across the mortgage market as a whole will ensure that later life lending can be a fourth pillar of retirement planning and help deliver good customer outcomes. We can surely all agree on that.
