Ageing population and shifts in the later lending market

Rising life expectancy and falling fertility rates have driven an ageing population in the UK. Therefore it’s no surprise that this is causing shifts in the mortgage market as the population of older homeowners (aged 65+) is also on the rise, reportedly at an even faster rate. According to data from the Office for National Statistics (ONS), this population has risen by 52% over the last 20 years to 2016, compared with a 28% rise in the overall population of this generation. With this in mind, older homeowners today are sitting on a great deal of UK’s housing wealth.

As a result, lending into retirement and equity release are topics often receiving attention from RFi Group’s clients. While the options available to consumers has increased in recent years,  RFi Group will explore further whether or not this has translated into adoption as well as what the future appetite holds for older demographics.

Current landscape

As of March this year, the Financial Conduct Authority (FCA) allowed a new breed of Retirement Interest Only (RIO) mortgages, which are similar to standard interest only loans but the key differential being having no set term. It also has the ability to be repaid upon sale of the property on the death of the borrower or moving to a care home but borrowers must demonstrate their ability to make interest repayments via affordability checks. Bath and Vernon Building Societies were the first providers to introduce such loans, with a number of other providers following suit. The minimum age for these products can start at 55 but can go up to 60 or 65 according to the lender. 

However, for those not wanting to make monthly commitments, equity release may be a better option. This comes in two forms: home reversion plans and lifetime mortgages, where the first product involves selling part or all off the property at a discounted price to a lender who then owns a share. Lifetime mortgages include borrowing against the home value, with the amount borrowed to be repaid with all interest with the eventual sale of the property. The interest can be rolled-up over the full term, or paid monthly. 

The equity release market has grown in popularity with the Equity Release Council stating that 139 equity release products were available in August 2018, more than double the amount compared to two years ago. While insurance firms are typically known for such products, Nationwide was the first high street provider to offer its ‘Lifetime Mortgage’ at the end of 2017 to new and existing customers aged between 55 and 84. This charges no product, valuation or advice fees and works by rolling up the interest so no repayments are made during the borrower’s life. 

Despite growing choice by lenders, RFi Group data shows that this isn’t reflective in uptake as less than 1 in 10 mortgage holders in 18Q3 have drawn on the equity in their home, suggesting some reluctance in the market for adoption. On the other hand those who did draw on their home equity, home improvements and paying off debt(s) are the main triggers, while retirement reasons lag behind.

Future appetite 

Future appetite is looking promising of such products as RFi Group tested the appeal of a range of retirement products and found that the appeal of a retirement interest only mortgage was considered more appealing when compared to equity release products among current and prospective mortgage holders. Around 3 in 10 of these consumers consider the retirement interest only mortgage appealing (score of 6+/10) with equity release appetite falling slightly behind these figures, although these percentages do not vary by much.


No doubt there is some apprehension in the market, with those who consider equity release unappealing (48% giving a score of 0-4/10) blaming this on unsuitability/ not currently needed (18%), lack of understanding (15%) and wanting to pass on inheritance/ save for future generations (11%). Therefore it is essential for financial institutions to address such concerns if it is to overcome any potential barriers to uptake. 

Conclusion

Regulatory changes by the FCA with its introduction of new RIO mortgages, combined with lenders releasing new products over the years have increased the options available to older borrowers. Having said that there is still a great deal of reluctance in the market for retirement and equity release products which can be blamed on unsuitability, lack of awareness and wanting to pass on housing wealth to future generations. While appetite exists in the market, lenders will need to address the concerns of homeowners first through support and advice in order to overcome the barriers to uptake. Meanwhile, with retirement interest only mortgages showing higher appeal than equity release, it could be a potential path for lenders to consider since the rules were relaxed in March and could provide borrowers the reassurance they need in terms of inheritance.
 

There is still a great deal of reluctance in the market for retirement and equity release products
 

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