And it is not a moment too soon with borrowing from property, into and through retirement, becoming a strategy relevant for a broad and diverse range of customers rather than, as was historically the case, a last resort for just a few.
However, as a market covered by two regulatory regimes and serviced by both specialist advisers and mainstream mortgage brokers, it is necessary to challenge ourselves as to how we evolve to ensure good outcomes for all customers.
Longer term options
Even in the current higher interest rate environment, one area for discussion is around longer term fixed-rate products and why they do not make up a higher proportion of this market. Whether that be, retirement interest-only (RIO), long-term fixed rate mortgages (LTFRM) or lifetime mortgages (LTM), which together represented far less than 15 per cent of total new LLL in 2021.
When compared to first-time buyers or second steppers, older customers often have less financial resilience to deal with inflationary pressures and/or unexpected one-off costs and a greater propensity to suffer changes in health while they have borrowing in place.
Therefore, taking a more holistic view of long-term affordability beyond just lender eligibility criteria, balancing immediate and longer-term needs, and providing older borrowers with the surety of knowing how much they need to pay each month, can be important in cushioning them from the type of shocks we are currently seeing.
The RIO vs lifetime mortgage debate
Within the existing LLL product landscape, the relative adoption of RIOs versus LTMs has been frequently commented upon. When compared to RIOs, LTMs offer fixed rates for life and have more embedded protections, for example guarantee of tenure and a no-negative equity guarantee.
Modern LTMs also offer the opportunity to service interest, make ad hoc capital repayments and see fixed early repayment charges (ERCs) expiring in as little as four years which make a compelling proposition for a wide range of customers, even in the current environment given the flexibility to manage borrowing and even to remortgage to lower rates in the future.
So, even leaving aside any differences in broker remuneration, it is perhaps easy to understand why LTMs continue to outsell RIOs.
Revising proc fees
However, specifically in relation to differences in procuration fees, rather than an alignment between mainstream and LLL products, perhaps what is required is more explicit recognition that the needs of older customers are different and therefore that advice approaches and broker remuneration should reflect this.
To support more product recommendations that better reflect the needs of older customers, when setting procuration fees, consideration needs to be given to average loan size, the nature of the advice required at outset and what is expected in terms of ongoing contact with the customer.
In this context, isn’t it appropriate that upfront broker remuneration for long-term fixed rate products aimed at older borrowers is higher than for shorter-term options? In addition, perhaps trail commission payments that encourage more regular reviews and/or advice interventions through the lifecycle of a product should become the norm?
However, this is the smaller part of the debate. Why don’t LTM, long-term fixed rate RIO and LTFRMs combined account for a larger proportion of the annual c.£55bn LLL market?
Indeed, long-term fixed rate RIOs and LTFMs should have a significant role to play in the LLL market for customers with good affordability. Providing certainty around repayments and, when compared to LTMs, offering higher loan to values (LTVs) and lower rates.
However, the rates and features currently available on these products are often not competitive with the alternatives. Also, procuration fees are arguably more appropriate for products and advice approaches typically delivered to younger customers. To address this as well as support better advice and improved outcomes for older borrowers, providers of long-term fixed rate RIOs and LTFMs might need to consider different sources of funding more akin to those which support the LTM sector.
Customer needs drive the market
With Consumer Duty set to raise the bar for the whole financial services sector, robust debate is required to ensure the LLL market evolves in a way that is customer-centric as opposed to product-centric.
A healthy and vibrant market will be one driven by customer needs with advice at the centre.
The approach to advising older customers must evolve alongside lenders tailoring their product design, pricing and remuneration structures to ensure fair value and good outcomes for customers.
