David Forsdyke, recent winner of ‘Market Champion of the year’ at the 2023 Later Life Lending awards, believes the equity release industry needs to undergo a fundamental change. Here he explains why.
Just 10 years ago the majority of mortgage lenders had a maximum age limit of 75, and the range of products that allowed you to borrow into retirement was extremely limited. Most older homeowners were forced to choose between selling and downsizing or using an equity release product to repay an existing mortgage so they could remain in their home. Similarly, older homeowners who didn’t have a mortgage, but wanted or needed to release the equity built up in their homes to make purchases or gifts, were faced with limited options, and equity release was often the only way forward. As a result, many equity release advice firms have emerged to provide this much needed service.
Turn the clock forward as we step into 2024 and Equity release is no longer the only option. The choices open for older homeowners is now greater than ever, and is still growing at pace. Firms who still only offer advice on the limited number of equity release products not only risk being left behind, but are opening themselves to criticism from the Regulator who have made it clear all the options open to a consumer must be explained and, where eligible, discussed & considered as part of the advice process. The equity release industry must become the Later Life Finance industry to keep pace with this rapid evolution.
The need for mortgages in later life has been driven by a number of factors including:
- A decline in pension provisions and savings, leaving many ‘Asset Rich, Cash poor’ thanks to rapid rises in their house values over the last 30+ years
- Homeowners taking out longer mortgage terms that extend beyond retirement,
- Improving life expectancy, meaning our financial resources need to last much longer,
- A greater desire to remain in our homes.
- Changes in attitude where borrowing post-retirement is more accepted
The next generation is also having an impact, and the ‘Bank of Mum and Dad/Grandma and Grandad’ is playing an increasingly important role in supporting first-time buyers’ who would otherwise struggle to afford property.
At the wealthier end of the scale, the Inheritance Tax regime has not really changed since 2009. Meanwhile property values have pretty much doubled since then. This potentially exposes huge amounts of property wealth to IHT, and affluent homeowners have started borrowing in order to redistribute their wealth to the younger generations. Not only can this help reduce the potential IHT, but it also creates economic liquidity from an otherwise illiquid store of wealth.
How has the mortgage market responded to these changes?
The term ‘Equity Release’ only captures two products; Lifetime Mortgages and Home Reversion Plans. Lenders have realised the aging population are actually a great group of customers who need to be looked after. There are now at least 10 different products and features I discuss with my clients, including;
Retirement Interest Only Mortgages (RIO)
Often called RIO mortgages, these work in a similar way to an ordinary Interest Only mortgage, but they have no fixed term. Instead, the loan runs for the rest of a client’s life or until they move home, perhaps to another property (where they may take a new RIO mortgage) or into care. The borrower pays interest each month, and the amount they can borrow will be determined by their income and an affordability assessment by the lender. As advisors, we have access to the lenders’ affordability criteria and can quickly tell our clients how much they can borrow and how much it will cost. More lenders are entering this market and 2024 will see choice increase.
Gone are the days when all mortgage lenders would draw the line at a certain age. I believe an increasing number of lenders will review and extend their criteria this coming year, and some already allow borrowers to take a loan to age 85 or beyond, while others have removed their age limits completely. As long as you can afford to meet the regular payments, lenders will lend.
Hybrid mortgage products
The term ‘Hybrid’ is often used to describe mortgage products that look like a regular mortgage, but then allow you to transition into a RIO or Lifetime Mortgage at a later date. This is the latest innovation in the sector, and 2024 will see further possibilities emerging for borrowers who were otherwise trapped in an unaffordable mortgage and being forced to sell.
Private Banking facilities
For the affluent homeowner, Private Banks have stepped up with banking and mortgage facilities that are not restricted by age but are designed to support customers as they transition into their later years.
Bridging Loans and second charges
Although not restricted to the Later Life Finance market, access to short-term borrowing has become more popular for older borrowers. For those who are downsizing but want or need to move into their new home before the current one is sold, a bridging loan with retained interest (so there are no monthly payments) can be a useful tool. It gives time and breathing space to sort out the current home. It also avoids the stress of a simultaneous sale and purchase, which is particularly welcome for those experiencing declining health.
A Lifetime Mortgage – Lump Sum
Unlike a normal mortgage, a lifetime mortgage has no fixed term and offers greater flexibility. The loan runs until the borrower passes away or move home/goes into care. At that point the property is either sold and the mortgage repaid, or if moving house it can be moved, or ‘ported’ to your new property. Interest is charged in the same way as any other mortgage, but with a Lifetime Mortgage the borrower can choose to let it roll up on top of the loan, pay some or all of it each month, or make ad hoc repayments. The amount you can borrow is based on your age and the value of your property.
A Payment Term Lifetime Mortgage
Available to borrowers aged 50 and over who are still working, a Payment Term Lifetime Mortgage (PTLM) requires interest only payments until retirement or age 75, whichever is sooner. From then on the borrower can allow interest to roll up. This allows borrowers to access larger loans than other lifetime mortgages.
A Lifetime Mortgage – Flexible Drawdown
Sometimes this is known as a reserve facility. This is an amount pre-agreed when the lifetime mortgage is first taken out and allows you to withdraw (draw down) these funds when you want them. This can be on a regular or ad hoc basis, and the advantage is that you won’t pay any interest until you have drawn the money. This is ideal if you need to top up your income regularly, or don’t need funds immediately but can see a need coming in the future. It gives you complete control over how much and how often you withdraw.
Sometimes credit transfers to 0% or short-term use of unsecured finance can benefit as no costs for early repayment and may be more suitable for small amounts. Also can be used in tandem with secured finance without requiring legal charge and fees etc
Home Reversion Plans
Still included within the phrase “equity release”, although no current lenders offering new business, there are a number of existing cases that advisers need to understand client options.
How can advisers adapt?
Firms need to embrace all of these options and give clients balanced, unbiased advice. I believe the best way to make this transition is to drop “equity release” from our vocabulary and start referring to “Later Life Finance” which embraces all forms of borrowing.
If you would like to know more you can contact David directly at firstname.lastname@example.org