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Downsizing solution for older borrowers hobbled by lending restrictions

  • 12/02/2016
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Downsizing solution for older borrowers hobbled by lending restrictions
Barratt Developments has said it is ready to provide homes for older buyers who want to downsize, but is being held back by potential buyers’ inability to get finance.

The builder said it would take a closer look at increasing much needed supply for homeowners looking to downsize, if older borrowers got access to better funding options.

Adrian MacDiarmid, head of mortgage lender relations at Barratt, said many people in the builder’s target group avoid equity release as interest rates are generally higher than they are used to paying. He suggested a low loan-to-value, interest-only mortgage for life as a good alternative, as it would keep monthly repayments low while equity is released through downsizing.

The proposed product would suit borrowers who have a track record of paying their mortgage over several decades and who receive income through a final salary pension, a pension pot or annuity, as they represent a low lending risk, he said.

However, it is riskier for lenders to offer mortgages without end dates, both for the institution and the financial health of the sector, said Paul Broadhead, head of mortgage policy at the Building Societies Association (BSA) said this week at the Shakespeare Martineau Mortgage Lending Conference.

He said lenders are not allowed to offer products with no end date unless it is a lifetime mortgage, under current Financial Conduct Authority (FCA) regulation.

He said the FCA prefers the use of the existing lifetime mortgage structure, an equity release product which is regulated in a different way as it does not require repayment and comes with protection and advice beneficial to consumers.

Broadhead said consumers would best benefit from a hybrid product that starts as a repayment mortgage throughout the borrowers’ working life and switches to interest only on retirement. If they cannot continue to service their mortgage at any point, they can move onto a lifetime mortgage with an interest roll up.

This type of product is presently unavailable as the FCA does not consider a lifetime mortgage to be a suitable repayment strategy for interest only, Broadhead said. He added that the three aspects of the product would be subject to different regulation, with contrasting ways of funding and would need to be served by various lenders.

Broadhead said the product would also run counter  to current short-term borrowing and long-term lending practices. He added that as many lenders fund mortgages with savings, the risk mismatch lies in lenders granting volume mortgages with no end dates and the funding source, like the savings markets dries up.

However, MacDiarmid argued borrowers will be forced to repay large debts they are already servicing on a monthly basis if lenders are not able to roll over the loan and instead insist on repayment at the end of term.

The FCA declined to comment.

Lenders and brokers must also consider older borrowers’ vulnerability to avoid a new PPI type mis-selling scandal, attendees at the Shakespeare Martineau conference also heard on Wednesday. As borrowers age, product sales risk increases substantially without the right legal checks, reporting requirements alongside training for advisers, said Shakepeare’s Paul Saunders.

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