Understanding the later life lending evolution and how to deliver good customer outcomes

Modern lifetime mortgages have evolved to meet the changing needs of older borrowers, reflecting broader changes in the wider mortgage market.

According to the latest Equity Release Council figures around half (48%) of later life lending borrowers are aged 55 to 60, and more than 73% are aged 55 to 65. A new generation of customers is coming to the later life lending market looking for solutions for different needs.

Later life lending customers now may be retired, working part-time for lifestyle reasons or because of ill-health, or many may still be working full-time and intend to do so well beyond state pension age. Many will still be paying mortgages and be looking for solutions to enable them to manage their mortgage debt into and through later life.

Customers aged between 50 and 60 may have seen more limited house price growth than those in their 70s and 80s and may still carry debt as they build up to retirement. They need later life lending products which can help with retirement planning as well as allowing them to manage debt in a flexible and efficient way. 

Achieving good outcomes in line with Consumer Duty for this emerging generation of customers requires comprehensive conversations around affordability in the later life lending advice process, including the benefit of making some level of regular repayment in the event that a lifetime mortgage is the most suitable product.

Equity release is no longer a term synonymous with products that only offer roll-up of interest. Modern lifetime mortgages, many of which include flexible repayment features, provide a suitable option for a significant percentage of over 55s customers enabling them to actively manage their borrowing as their circumstances change through later life. 

Customers can choose their monthly payment and payment term subject to minimum and maximum terms and there is no set percentage of interest payments. Rate discounts can be available depending on the product and are based on the customer’s circumstances, how much they choose to pay and for how long. Customers can make voluntary overpayments which, as well as further mitigating the impact of compound interest, can be used to reduce the outstanding capital balance. 

Lifetime mortgage lenders have adapted to address the needs of a different profile of customer and advisers should too. Indeed, these modern lifetime mortgage products, which also offer surety of tenure and a no negative guarantee, may on occasions be an appropriate option for a customer even if they are eligible for mainstream products. That said, specialist equity release advisers also need to be aware of the solutions available through standard mortgages aimed at older borrowers as well as retirement interest-only and term interest-only products. This highlights the importance for all advisers to maintain a wide field of vision and ensure they are considering all options – even if some of these sit beyond the scope of their advice proposition.

The changing market

The average age of first-time buyers is now 36 and one in five is estimated to be 40-plus. More than half of borrowers choose 30-plus year mortgage terms. A 36-year-old first-time buyer choosing a 35-year mortgage term will be paying a mortgage until they are 71. As people buy homes later they will need to manage debt into retirement.

Traditional equity release customers aged 70 to 80 remain an important part of the later life lending market. These older borrowers are likely to have benefited from decades of house price growth and usually own their homes outright. 
They tend to release property wealth to enhance their standard of living in retirement or to gift money to relatives. They tend not to want to make monthly payments on their lifetime mortgage although this should not preclude advisers highlighting the benefit of them doing so in terms of preserving equity for their beneficiaries and/or maintaining optionality in future years if remortgaging to a lower rate is a potential objective.

The emerging generation of customers, however, are often more receptive to making monthly payments if transitioning from a mainstream mortgage and the importance of them mitigating the impact of interest accumulating on their loan is arguably even greater given the potential duration of the contract and the likelihood of circumstances changing in the future. 

Yet, research from Air shows that advisers are still not adapting their advice processes to take account of the new product landscape and a different profile of customer from those these may have historically helped with equity release. Nearly half (45%) of later life advisers using the Air Sourcing tool had not searched using the affordability repayment toggles available in the last 12 months.

With innovation in lifetime mortgages extending beyond just repayment options to include things such as bespoke LTVs or rates based on health/lifestyle characteristics and fixed early redemption charges (or even products with no ERCs), the products are available to achieve good outcomes for a large and diverse group of customers. However, advice standards need to catch-up. 

Comprehensive conversations

The numbers add up to make the case that making some level of repayment on a lifetime mortgage offers better value for customers in the long-run and ensures more options are open down the line. 

Take the example of a 55-year-old releasing £40,635 on a £189,000 property. Using representative current interest rates of 6.99% MER available on lifetime mortgages, with no repayments after 27 years the total cost of borrowing will be £266,788. Paying £70 a month on the same interest rate will mean a total cost of borrowing £222,587 after 27 years.

That’s a saving of £44,201 but if the monthly payments go up to £338 a month the savings go up to £196,822. In addition the borrower has retained equity of £322,602.

These numbers are compelling and demonstrate the importance of advisers having comprehensive conversations about the potential benefits of making regular payments. Some customers may still be reluctant to commit to these repayments for a variety of reasons, but the role of an adviser is to ‘advise’ not to ‘order take’ and sometimes challenging conversations are needed in order for the right outcome to be achieved. 

Assessing affordability is critical to ensuring all options are considered in getting to the right lifetime mortgage recommendation and the assessment should also include mainstream mortgages, RIOs and TIOs. 

The affordability assessment

Affordability assessments should focus on income, needs and wants. Income should include guaranteed income and sustainable regular income but also reductions to income such as working fewer hours or stopping work in the future. Bonuses need to be ruled out as well as any income that is not guaranteed including gifts or windfalls.

What customers need income for is contractual commitments and essential living costs for them and any pets. That includes insurance, travel costs and habits, but expenses that can be put off or they can live without do not need to be included. 

What customers want income for would include spending that maintains their quality of life such as home entertainment, regular savings and money to pay for celebrations such as Christmas, birthdays and weddings.

Advisers may want to ask customers for bank statements so they can be sure about income and spending or potentially offer customers budget tools and calculators so they can do a full assessment of their own circumstances. 

Recommending a product involving a committed payment is not always the best outcome if a customer is unlikely to be able, or willing, to maintain repayments. As always with advice there is not a one size fits all approach and detailed personalised fact finding and research is critical in all circumstances.

Finding the right solution

Tools such as Air’s Later Life Lending Navigator or LiveMore’s Mortgage Matcher enable advisers to identify the solutions which clients may be eligible for whether that be equity release, interest-only products, or retirement-focused lending options.
 
Air’s Navigator tool focuses on affordability considerations to help narrow down the range of potential products which may be suitable for the client and then enables advisers to compare the total cost of borrowing across lifetime mortgages with repayments and without repayments as well as for residential mortgages and retirement interest-only mortgages.

Affordability must always be at the forefront of the process when advising older customers so that all options are considered. With sourcing platforms not always representing the full spectrum of later life lending products, these triage tools can be invaluable in establishing where further research should be focussed.

Comprehensive conversations help to not only deliver great customer outcomes, they are fundamental to changing the perception of equity release for many customers and advisers from a product of last resort to one that is a normalised part of sensible later life planning. The modern lifetime mortgage is a suitable option for a growing number of over-55s now and as the wider mortgage market develops it will be a suitable option for even more customers in the future.

Advisers will benefit from huge opportunities in a rapidly growing market if they can broaden their field of vision and adapt their processes. This evolution is also critical to ensuring customers receive good outcomes as well as supporting the broader societal need for property wealth to be used to finance retirement.