The Financial Conduct Authority (FCA) recently expressed concerns about the growing number of people aged between 55 and 60 taking out lifetime mortgages.
The problem for younger borrowers is the amount of time that interest on a loan can roll up, according to adviser Andy Wilson.
These homeowners could pay rates of around 6%, which would double a £40,000 loan within 12 years.
Someone who took the loan at the age of 55 could then be looking at a debt worth £320,000, if they live to around 90 years old.
Wilson believes the minimum age on lump sum equity release should be moved to 60.
He told Mortgage Solutions: “People who need money desperately at the age of 55 or 56 and borrow the most they can will be subject to the highest interest rates.”
He is concerned these people will have no fall-back later in life should they need money for care or find their pension is falling short of their needs.
Wilson added: “If you’ve taken the maximum equity release you can at 55 with the resultant higher interest rates, you are unlikely to get another bite of the cherry… These are the sort of warnings I give to people.
“If the minimum age was 60, at least it would mitigate some of that problem by reducing the amount of equity eaten away by the plan.”
Most clients aged around 55 usually opt to pay off some, or all, of the interest each month which slows down the rate of debt increase but, crucially, not all people take this option and don’t listen to adviser warnings for their future, according to Wilson.
Younger borrowers most likely to opt for lump sums
The number of people using equity release products has surged in recent years, with the number of plans increasing 28% year-on-year in 2018, according to the latest figures from the Equity Release Council.
And those aged between 55 and 64 are the most likely to opt for lump sum loans, where interest can roll up faster, compared to draw down plans where cash is taken more gradually.
Around 44% of customers aged below 64 opt for lump sums, against just 23% of those aged above 85.
Simon Chalk, managing director of Laterliving Now, said: “It’s very true that younger borrowers face the prospect of a greater debt to their estate.
“Time and compound interest take no prisoners – it’s just a matter of doing the math.”
However, there are times when a younger borrower’s only option is an equity release lump sum plan.
He said: “In an ideal world, clients would not turn to equity release in their mid-50s to 60s, but often it is the best, or sometimes the only, way of meeting their objectives.
“For example, I once arranged a £100,000 lifetime mortgage for a successful businesswoman, aged under 60, single and with no children, who owned three properties worth a total of over £2m.
“Why did I do arrange equity release instead of telling her to sell a property?
Because she was diagnosed with terminal cancer, given six months to live, had no liquidity whatsoever, and her ‘bucket list’ was to take her three best girl-friends to Las Vegas for a luxurious holiday.
“No no-one can question the value of a loan like that, but such stories don’t make it past the red-ink line.
Customers more savvy
Stuart Wilson, marketing director at lender, more 2 life, said he would be surprised if there are large amounts of healthy 55-year olds who take out ‘max cash’ lump sum mortgages.
He believes borrowers today are “more savvy” and opt for draw down over lump sum advance, taking smaller initial advances, and only borrowing more as and when they need it.
There are also more products in the market which allow borrowers to pay interest or make capital repayments to prevent interest from spiralling out of control.
The FCA estimates the amount of borrowers below 60 taking out lifetime mortgages make up about 7% of the market – working out at up to 3,000 plans a year.
Matt Sutton, managing director of Emerald Finance agreed these customers are a small part of the market and there can be circumstances where it is the right option.
He said: “As an adviser you just need to make sure it is best advice and there isn’t a more suitable option available.
“Every market has its niche and there will always be people that may take this route for a variety of reasons – from just wanting to stay in their home a bit longer before they downsize, to those who can’t get a normal mortgage.
“Or perhaps don’t have any beneficiaries that decide this is the best option for them.
“To increase this age limit would take away what is for some people, potentially their only option.”
Imperative to get good advice
There shouldn’t be a problem for borrowers who have taken good quality specialist advice, according to Will Hale, chief executive at adviser Key.
He said: “It is vital that people seek advice from a specialist in the later life lending sector.
“Specialist advisers will ensure that not only does the customer fully understand the potential impact of compound interest but also that they have considered other options such as downsizing, retirement interest-only (RIO) mortgages and traditional mortgages designed for older borrowers.”
Good advice will help borrowers understand how their future could pan out for the better or worse, according to Keith Haggart, managing director at lifetime mortgages provider Responsible Lending.
He said it can be harder for a younger borrower to envision their needs but “it is not right to say lifetime mortgages are wrong for everyone aged under 60”.
Haggart added: “Some people do retire earlier for ill health and may see equity release as the best way to receive care in their home.
“Retiring early will impact pension savings.
“Advice has to consider the availability of state benefits, including pensions, both at the point of advice and in the future.”