"This type of conversation needs to become more common later life lending as for most people the biggest risk they’ll take with their home is attaching a mortgage to it."
Long-term fixed, short-term variable, short-term fixed, downsizing protection, take cash now or use a drawdown facility, make mandatory payments, make voluntary payments, don’t make any payments at all… all regular discussions for any responsible later life lending adviser, but are we missing the point when it comes to how we approach these conversations?
I think we’d all recognise that list of options, but I view them as a suite of protections against a range of different risks rather than just features or products.
In the investment world an investor’s attitude to risk is one of the defining aspects of any advice that’s provided. Risk and return is openly discussed as well as the direct correlation between each of these factors. This type of conversation needs to become more common later life lending as for most people the biggest risk they’ll take with their home is attaching a mortgage to it. Outside of a natural disaster or catastrophic accident there’s not much else that could cause them to lose the roof over their heads.
As an older borrower, by agreeing to make mandatory payments and accepting the risk of repossession (no matter how unlikely) you are rewarded with rates that are typically lower than if you elected not to take that risk and instead chosen a lifetime mortgage. Modern lifetime mortgages allow customers to serve interest and/or make capital repayments and any difference in the interest rates available across the different product types is likely to be quite small – particularly at low LTVs. Historically there has certainly been more of a divide, but lifetime mortgages can now look and feel very similar to other options that would traditionally be seen as part of the standard lending market.
The same can be said if a borrower is concerned by the risk of rate rises and takes a longer term fixed rate, they accept that the additional cost is the price to protect themselves against the risk that they are trying to avoid. Likewise a couple considering borrowing into later life but unsure of the stability/longevity of their retirement income and future living costs (both of which may be influenced by changes in health), might elect to protect themselves against those risks. A lifetime mortgage product that allows them to stop making payments at will and let the interest roll-up should their circumstances change may be an appropriate solution. These flexibilities around payments on a lifetime mortgage can be exercised safe in the knowledge that they can remain in their home for life (or until residential care becomes necessary) and they will never owe more than the value of their home.
In all of these scenarios the borrower/adviser discussion - and ultimately the product recommendation – is built around the trade-off between the cost of the protections and the borrower’s personal risk appetite. This is a concept that most customers understand but it is the adviser’s job to probe customer understanding/perception around the probability of a particular risk manifesting and whether this is acceptable to the customer.
The question then becomes is the additional protection provided by the product worth the additional cost given their individual circumstances and personal attitude to risk?
Whilst there is not one right answer to any scenario, I do think this is an area where the lack of holistic advice or lack of awareness of intermediaries around the options available could impact on customer outcomes. As an industry we often avoid comparing risks and protections across the market because we typically only have one set of tools in our toolbox. As a result, I think we might be missing an opportunity to have some really valuable discussions with our customers.
As I’ve said before this isn’t about saying product A is better than product B – that’s an adviser’s job - but I do think we need to reframe our discussions around risk and the protections and be prepared to broaden the scope of the advice we offer or ensure that we have appropriate referral mechanisms in place.
As later life lending advisers we must ensure that we have the same robust, transparent and personalised conversations with our customers that our investment and pensions colleagues are having with theirs.
