Irrespective of whether the loans are secured or unsecured, if debt is being taken into retirement most customers want to feel that they have some control over how they manage and ultimately repay this borrowing.
Modern lifetime mortgage products have developed considerably in the last decade in terms of the range of flexible features they offer. The ability to either service interest or to use ad hoc capital repayments to mitigate the impact of compound interest is a discussion all specialist advisers will be having with customers, and these are features customers clearly value.
Almost half (47 per cent) of clients who took out plans with Key in Q4 2022 said they intended to make some repayments over the course of the loan.
With rates starting from just under six per cent which is considerably higher than the 2.8 per cent we saw at the end of 2020, the impact of compound interest if no repayments are made means that it has arguably never been more important for advisers to be talking to customers about repayment options.
However, given the current cost-of-living crisis and the fact that the pressure on household finances is a major driver for people considering equity release, the short-term attraction for customers of not needing to make any repayments can be a challenging one for advisers to counter.
With inflation still in double digits and over-55s more likely to be feeling the pinch due to their spending patterns, making any repayments may be difficult. Indeed, before taking out equity release, these customers may have already discounted products with mandated payments or been ruled out from accessing them due to affordability criteria.
Focusing on good solutions
So, what should we be doing to ensure good outcomes for customers?
As part of the advice provided, the benefits of making repayments need to be stressed. This has to be something more than simply a question around “whether you want/intend to make repayments” but a proper discussion about managing income and expenditure to allow these repayments to be made.
Customers can often have a short-term perspective and it is the responsibility of a specialist adviser to balance the attractions of no mandated payments with the long-term risks associated with roll-up interest.
If the outstanding balance on a lifetime mortgage is allowed to compound unchecked, then this will limit a customer’s options down the line – including the ability to raise more capital or remortgage to another product if rates fall.
Whether you use lenders’ calculators or those embedded into your own advice process, the figures speak for themselves and can help clearly illustrate to a customer the positive impact of making even modest regular repayments.
We are advisers not ‘order takers’ and therefore it is important that we are prepared to have tough conversations with customers and find ways of nudging people to the appropriate conclusions.
The best outcome for changing circumstances
With the Consumer Duty deadline rapidly approaching, we also need to consider whether our advice is a moment in time service or something that extends beyond the initial product sale.
This is particularly important when it comes to lifetime mortgages which may need to adapt to changing customer circumstances over many years. While there is no right answer to this question it is vital that customers understand what they should expect in terms of ongoing adviser contact.
If the quality, cost and efficiency of providing an ongoing service is to be improved, do we need better data sharing between advisers and lenders?
An example of this would be lenders providing more information to advisers about the repayments that a customer is making over the lifetime of a loan. With a product where repayments are not mandated, it may be useful for advisers to know if customers are making repayments in line with what was anticipated in order that any advice intervention can take place in a timely manner.
Product innovation in the lifetime mortgage sector should be celebrated and the flexible repayment options now available to many customers can be used to support improved outcomes in the current rate environment.
However, advisers must continue to adapt their approach to ensure that short-term financial pressures faced by customers don’t always override longer-term considerations.
