Innovation and education in the later lending market
If we want the later life lending market to reach its full potential we need to innovate and educate. We need to develop products that meet the changing needs of an ageing population, and upskill the market on retirement interest-only (RIO) loans.
Demographics are driving demand for an expanding later life lending market. We are living longer and working later. More than 10% of men and 8% of women in Britain are now working beyond the age of 70, according to figures from the Department for Work and Pensions.
Managing debt
But maturing demographics is only one driver for the later life lending market growth. There is a generational shift in the way we view debt. Historically, the norm was to strive to become debt free. To pay off the mortgage. Increasingly as a nation we are favouring manageable debt over no debt.
Interest-only mortgages are maturing in greater numbers. Homeowners are coming to the end of their interest-only mortgage after 20-25 years with their existing lender, and many of these borrowers do not have a repayment vehicle in place. It’s at this time that they start the process of turning to the market and looking for lenders to give them a mortgage.
Gifting the deposit
There is a further segment, homeowners with unencumbered properties. This group are increasingly turning to later life lending in order to raise monies to help their children or grandchildren gain their first rung on the property ladder by gifting them the deposit to buy a property.
There are many reasons why the later life lending market is growing so rapidly. If the market is to continue to grow and satisfy greater demand we need both product innovation and more advisors equipped to effectively explain all available products.
Product types
Later life lending has three categories. Lending in and into retirement and equity release are both well-established. Last year £3.06 billion of equity was released by older homeowners. The retirement lending market in the UK is set to more than double to £142 billion within a decade. The third, and newest later life lending product, introduced this year is the RIO.
RIO
It was not until March this year that the Financial Conduct Authority (FCA) removed a regulatory barrier to allow ‘retirement interest-only mortgages’ for older consumers. The Tipton was the first building society to launch its RIO range into the market three months later.
The regulator responded to the need for such a product seeing more and more people coming to the end of their mortgage term having held that mortgage for 20-25 years but with limited options for taking another mortgage out, due to a limited lender market. Some lenders were apprehensive about lending to people either in or approaching retirement age. People tend to look at older people as being potentially more vulnerable. But what is old today?
Questions to ask
The mortgage advice process for a 55-year-old should be virtually the same as to a 25-year-old. The main questions boil down to asking:
• Can they afford it?
• Is the person receiving advice on the most appropriate products?
• Do they know what they’re doing?
• And, will all parties concerned be happy at the end of the term?
With RIO, for example, potential borrowers need to know firstly that these products exist in the market. Interest on a RIO loan is paid off each month, not ‘rolled up’ into the loan. But there is no end date. Potential borrowers need to know they can make interest-only payments until the day they die, or enter long-term care. They can also, with the Tipton product, choose to make overpayments of up to 10% a year and they can redeem the loan at any time should they wish to do so.
If we want the later life lending market to reach its full potential we need to innovate. We need to develop products that meet the changing needs of an ageing population.
Retirement homes
At Tipton, we are one of only a few lenders to include retirement homes into the property types we will lend on. We believe these retirement homes fit nicely with the requirements of someone who might want to take out a RIO, or another later life product.