Lending in retirement - what is contributing to growth in the market?

Life expectancy has increased dramatically in Britain from the 1930s, when the average man was only expected to live to about 60. By the 1950s, it had risen to 65 and now life expectancy is 79 for a man and 83 for a woman. That’s an extra two decades!

But our financial architecture doesn’t reflect how we live today. It’s largely left over from when people didn’t have that extra 20 years - a time when people had paid off their mortgages in their fifties.

Historically, mortgage lenders required loans to be backed not just by the security of the property but also by the main earner’s salary, so borrowers had to repay the loan before they retired. But the now-fuzzy boundary between working and retirement and the generous final salary pensions enjoyed by some mean many households don’t aim to be debt-free by their 60s, and the legacy of interest-only lending means others are not able to.

There is therefore a growing demand for mortgage products for older people both to maintain existing mortgages and to withdraw equity and use the money for other purposes such as home improvements or helping family members onto the property ladder. As a result, many lenders are looking for ways to tap into this expanding market and grow market share.

A closer look at what’s driving the increase in later life lending

• An ageing population - There are a growing number of older people in the UK. ONS data shows that there are now 20.9 million adults aged 55 and over, and this is set to rise by 13% to 23.7 million by 2030. By 2045, the ‘pensionable age’ group is projected to rise by more than any other demographic. This is in part due to the baby boomers from the 1960s now being aged around 80 years, as well as general increases in life expectancy.

• Changes to pensions – Since April 2015, people have been given greater control over their pension pots and drawdowns can be taken from pensions as and when required. They can decide how best to use all of their assets in retirement allowing more choice than ever. Not by coincidence, alternatives to equity release have grown significantly.

• 50+ still have borrowing needs - Despite the Covid-19 pandemic, the volume of mortgage lending to over 55s has remained strong and there were 187,120 new mortgages to borrowers over 55 completed in 2021, with total lending of £28.1 billion. In fact, 2021 saw the highest volume of lending to over 55s since 2014! Family Building Society’s research with the London School of Economics examined the drivers of remortgaging and equity release among older home owners. We found that the main uses of the funds released were to improve borrowers’ existing homes or buy a second home, or to help children and grandchildren in one way or another.

• Maturing interest-only mortgages – In the 90s many people took out interest-only loans at much higher loan-to-value ratios than would now be granted. Many had no plan in place to repay the capital when the loan term expired. Many of these borrowers are now in or nearing retirement and may have trouble remortgaging with their current lender if they’re unable to pay off the mortgage and don’t want to downsize. Although the amount of interest-only mortgages that need repaying has decreased over the last few years, largely due to regulatory pressure, UK Finance estimates that there are still currently 900,000 interest-only mortgages that will need repaying in the near future.

• People are working well beyond ‘normal’ retirement age - The number and proportion of both men and women aged 65 years and over who are working has generally risen across the past two decades. ONS data shows employment rates doubled for those aged 65 years and over between 1993 and 2018 and increased by almost one-third for those aged 50 to 64 years.

• Increase in house prices - The average house price in Feb 2002 was £101,164. This jumped to £276,755 by Feb 2022 (UK House Price Index). This increase in house value allows homeowners with unencumbered properties or small mortgages, to release more equity from their homes to spend.

What types of lending are available to borrowers in later life?

Lifetime mortgages were the go-to product for borrowing in later life but have stagnated in popularity as more standard and alternative options have become available. In 2021, the proportion of lifetime mortgages decreased to 22% of annual mortgage lending to borrowers over age 55, down from 24% in 2019 and 2020 (UK Finance).

• Standard products – Most older borrowers are well served with standard mortgage options from smaller specialist lenders (i.e. not the big 6) and many borrowers take loan terms that extend well into their 70’s. Data from UK Finance suggests nearly 4 out of every 5 mortgages for borrowers over 55 are standard mortgages.

• Joint Mortgage Sole Owner (JMSO) (or Joint Borrower Sole Proprietor) – With some specialist lenders, JMSO mortgages can be used by adult children to support their parents needing help with affordability past retirement, allowing them to stay in their home for longer. The property will be made out in the name of the parents, who are the proprietors, and the children become joint borrowers but are not on the title deed – this means they are not liable for the stamp duty on second homes. With the Family Building Society, for Owner Occupier JMSO, the standard age limits apply so buyers can be aged up to 95 at the end of the mortgage.

• Retirement interest-only (RIO) – With a RIO mortgage, borrowers only need to repay the interest rather than the capital and there’s no set repayment date. Instead, when the borrower dies or goes into care, the house will be sold and the mortgage paid off. However, RIO mortgages have not delivered the high numbers that were first envisaged. This is in part due to the affordability test where single applicants must be able to afford a RIO mortgage even if it is a joint application, in case one of the borrowers dies. When considering affordability, many lenders are also unable to take into account some income streams such as drawdown pensions and rental income.

Specialist lenders can help with flexibility

There is a huge opportunity for lending to those in later life. Notably with the smaller lenders who can be more flexible, with criteria that will meet your clients’ needs.

Many smaller lenders are able to lend long past retirement age for both owner occupier and buy to let products as mortgages can be manually underwritten so there is no ‘computer says no’ mentality. With specialist lenders, there’s often no credit scoring and they can take into account different income streams such as pension pots, Limited Company directors salary or dividends, plus rental and investment income.

At the Family Building Society, we see many cases from high street customers in their mid to late 60s where their current lenders won’t extend their term to the age that they need, typically over 75 or into retirement, despite the fact they have a good income in later life.