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Longer mortgage terms and lending into retirement must not ‘become next big financial risk’, FCA exec says

  • 10/05/2024
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Longer mortgage terms and lending into retirement must not ‘become next big financial risk’, FCA exec says
The potential risk of longer mortgage terms and lending into retirement should be managed so it does not become a problem in 20 years’ time, the Financial Conduct Authority’s (FCA's) chief operating officer (COO) has said.

Speaking at the Building Societies Annual (BSA) Conference, Emily Shepherd (pictured), the FCA’s COO, said that building societies have “demonstrated their resilience and adaptability”.

She added that mutuals have also “helped consumers build their resilience, not giving up on them when the going got tough, reaching out to under-served groups and turning risks into opportunities”.

However, she said that it was incumbent on regulators, industry stakeholders and consumers to “ensure that they continue to lend responsibly, provide value, and innovate for the future”.

She said: “We must not let longer lending or lending into retirement become the next big financial risk. No one – not lenders, not consumers nor regulators – want[s] this to be the problem of 20 years’ time. Now is the time to recognise and manage these risks responsibly.”

Sharp noted that building societies must “embrace technology as a means of enhancing – not supplanting – their community-centred credentials”.

“Their very humane response to the local and global challenges of the last three years [has] shown us that they are on course to do just that,” she said.


‘Building societies have long been champions of under-served markets’

Sharp said that building societies were “quick to step up” during the pandemic, offering crucial support to customers in financial difficulties, adding that they had supported the Mortgage Charter with “gusto”, even if it “meant taking on additional financial strain”.

She continued: “Building societies have long been champions of under-served markets. They’ve reached out to more complex first-time buyers, the self-employed and other customers who often find themselves overlooked by other high-street lenders.”

Sharp added that they had supported borrowers with “lower deposits and financial means to achieve their aspiration for homeownership”.

“They have spotted opportunity where others just saw risk – and in doing so, you have also helped tackle financial exclusion. This commitment to inclusivity is commendable, but it also brings with it a responsibility to ensure that lending remains responsible and sustainable,” she said.


Technology and data could have multiple benefits

Sharp said that challenges for young people owning property “seems like less of a hill and more like a cliff”, pointing to rising cost-of-living expenses, growing rents and higher mortgage rates.

However, she said that first-time buyers make up half of mortgage homemovers, and lenders were innovating to help a “new generation” of borrowers.

This was being done through recognising rental history, allowing guarantors to improve income or using monthly subscription payments to boost creditworthiness.

She said that investment in technology and data could “reap benefits” in this area, but she understood that technology could be a “challenge” for building societies, especially those with legacy systems.

“Building societies must not let their hard-won reputations for integrity – a value that is in tune with younger generations – be overlooked in favour of challenger banks and their whizzier technology.

“By leveraging innovations such as open finance, AI, and digitalisation, building societies can streamline operations, boost resilience, and enhance the customer experience. Perhaps one way for smaller societies to do this is through collaboration with start-ups, tech firms or other building societies,” she noted.


Longer mortgage terms a ‘symptom’ of affordability challenge

Sharp said that there had been a rise in longer mortgage terms, with mortgages lasting longer than 30 years accounting for over a third of sales last year, a “symptom” of the “affordability challenge”.

She said that there were “trade-offs” as borrowers can lower monthly payments and get onto the property ladder, but it could mean they have “fewer options” when facing financial difficulty, and impact other aspects of a customer’s financial life.

“While we all want homeownership to be as accessible to as many people as possible, we must always ensure that lending is responsible and in the long-term interests of the consumer.

“Unaffordable mortgage debt is not just a financial or balance sheet problem. It leads to wider and deeper problems for individuals and society,” Sharp added.

She continued on to say that the industry needed to consider “what the appropriate level of risk for individuals and institutions should be in the trade-off between homeownership and long-term debt”.

Sharp said that, in a “higher-interest-rate environment”, the FCA was “open to engage with and support” innovation and creativity and how it aligned with its rules and consumer benefit.

“Our supervisory and policy teams, alongside our Innovation Hub and Regulatory Sandbox, are open to discuss any propositions. I would encourage all societies to consider these options as part of their product design process. And if there are unjustifiable barriers to responsible lending, leading to poor outcomes, we will act,” she added.

Lending into retirement should be area of focus

Sharp also singled out lending into retirement, noting that the projected median age of a first-time buyer at maturity is around 65 years old, a rise from 56 in 2005.

She continued on to say that building societies were “well-acquainted with the risks and needs of customers looking to borrow in later life”.

Sharp said that, with borrowers expected to hold debt for longer, it was important to ask whether the products and services offered will “meet their needs responsibly and help them meet their financial goals”, and what would be needed to support this growing cohort of customers.

“Getting this right will of course benefit those individual customers, enabling them to meet their housing needs in later life, and move if that is their aim. It may also support first-time buyers with an increase in the supply of homes,” Sharp said.

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