The ERC claimed ‘equity release customers saw unprecedented levels of product choice and flexibility in the first six months of 2019’ based on a rise in the number of products over the year, from 126 in August last year to 287 by August 2019.
I’m hugely supportive of increasing the range of choice available to older homeowners, particularly in terms of newer lifetime mortgage features such as downsizing protection and inheritance guarantees, but I think this market needs a big wake-up call.
There’s a real danger that these ‘good news’ stories make people complacent about the real problems facing this sector.
Choice is limited
The fact is that real choice for older consumers is severely limited.
Data I’ve seen from recent research undertaken by a retirement mortgage adviser shows that when older customers first approach their lender or adviser, 60 per cent are looking for a traditional mortgage, i.e. only 40 per cent would choose a lifetime mortgage of their own volition.
Yet 70 per cent of those customers coming out of the other end of the advice process have ended up with a lifetime mortgage.
Why? Because there are so few options open to them.
The real barrier is the affordability assessment. A mainstream mortgage extending into retirement needs to be backed by sufficient income.
Yet that same research found that 73 per cent of the applicants had insufficient retirement income to support a traditional mortgage.
‘Are you comfortable risking your home?’
What about a retirement interest-only (RIO) mortgage where affordability is assessed on the income of the surviving spouse?
The research found that the average second life income was below most market minimums.
What’s left? Equity release. No affordability assessment required. If you find yourself struggling, just roll the interest up.
The problem of rapid equity erosion may seem an acceptable price to pay in return for keeping your home, particularly when you have a no negative equity guarantee.
Little wonder then that I’m told that the opening question older customers looking for a mortgage are often asked is: “Are you comfortable with the prospect of losing your home?”
Who is going to say yes to that?
If you can’t afford to make the payments or worry that you may not be able to, you risk losing your home. That means the only show in town today is equity release.
It’s an easy sell for lifetime mortgage brokers.
FCA action needed
The Financial Conduct Authority (FCA) really needs to think again about this part of the market because this has the potential to turn into a very serious problem years down the line.
There are a number of areas that it would be good to see them rethink:
- The siloed approach to regulating the later life lending sector. Mainstream mortgages extending well into retirement, RIOs and equity release are all targeted at the same older borrower with the same characteristics and potential vulnerabilities. Why then should mainstream mortgages and RIOs be subject to a different, less onerous set of conduct standards? The same, equally robust protections should be afforded to all older borrowers.
- The legacy, siloed approach to regulating mortgages, pensions and investments as distinct and unrelated sectors simply ignores today’s realities. We no longer live in a world where you can expect to pay off your mortgage before you retire and live happily ever after on a nice pension. People are needing to borrow for longer and need to access the resources available to them to do that, including investments and pensions. The regulator needs to support this and be much more cross-sectoral in its thinking.
- When a borrower retires and has insufficient income, why can’t their housing wealth be sufficient collateral? The FCA has already relaxed its approach by allowing the sale of an older borrower’s home to be a suitable repayment strategy for RIOs. Why can’t it be a suitable strategy for older borrowers who are asset rich but income poor? Why can’t equity release itself be a suitable repayment strategy?
Customers forced to higher priced products
We are forcing older borrowers into higher-priced products through a lack of imagination and effort. New funding sources are being attracted into this sector today who are not inhibited by a need to protect existing business models and who are better able to support new, innovative propositions specifically designed to meet customer, as opposed to business, needs.
Those funders and a fresh regulatory approach could make a significant difference. Something needs to happen soon.
This market is growing rapidly and, as the only realistic option available to increasing numbers of older customers, the numbers potentially being given advice that could be shown later to have cost them dearly is rising daily.
Isn’t it time to stop patting ourselves on the back, focus on what the right overall customer outcome is and work together to fix a very broken market?
Lynda Blackwell is a consultant and ex-mortgage manager of the FCA