"With new big names joining the market, the level of competition in 2018 is expected to increase, but that may not result in further rate reductions."
FR: Legal & General became the biggest lifetime mortgage provider in H1 2017 – what has L&G’s proposition brought to the market and what do you have planned for 2018 and beyond?
Becoming the largest lifetime mortgage provider in H1 last year was a real achievement for the team at Legal & General, but it has been supported by an engaging proposition and our ambition to make lifetime mortgages a more mainstream solution for older homeowners across the UK.
This hasn’t only included being the first lender to launch a product with rates below 4%, but also innovative distribution deals with Santander and The Co-Op Bank, offering drawdown across our product range to make life easier for our customers.
But we’ve also looked at how we can help our intermediary partners too. That’s included digitising our application and moving away from a paperless business, as well as recruiting a new team to support brokers who are looking to talk to clients about lifetime mortgages.
As for 2018, we’re planning more digital development and the launch of some really exciting products that aim to meet different customer needs. We also hope to see more distribution deals following our partnerships with The Co-Op and Santander, to provide more people with the option of a lifetime mortgage, so watch this space!
FR: The proportion of new customers choosing drawdown lifetime mortgages over lump sum or home reversion plans is continuing to increase – why is this, and do you foresee this trend continuing?
Over the years, the mortgage market has increasingly seen drawdown as a ‘better’ option for customers. This is because lump sum products do not offer the flexibility in retirement that comes with drawdown, where customers can access what they need to now, and draw on more funds later if needed. Lump sum products risk customers borrowing more than they actually need, which could result in a ‘sitting on the cash’ scenario with customers putting aside their cash in low interest savings accounts rather than remaining invested in their property. It’s for this reason, and a desire to improve flexibility for our customers, that we decided to offer drawdown-only products last year, which I am sure has further contributed to this increasing market trend.
However, there are long term challenges associated with drawdown products.
It’s crucial that the industry makes sure customers are accessing drawdowns responsibly and for the right reasons. After all, a customer at 85 could be in a very different mental state than when they originally took out the product. Lenders have a responsibility to make sure the customer is in a good state mentally and understand exactly what they are doing, as well as identify any vulnerable customers.
As a lender, we’re working hard to address these challenges by developing a framework to support vulnerable customers and, where necessary, referring customers back to their solicitor or adviser.
As a market, we need to make sure that customers are accessing drawdown options responsibly and are mentally in a good place to be making these decisions. This includes customers fully understanding which product they are taking out. Any vulnerable individuals need access to help and support before considering any form of mortgage product and we have worked very hard to develop a fully-rolled out vulnerable customer framework, to support our customers and where necessary, refer them back to their solicitor or adviser.
FR: Will lifetime mortgage rates continue to fall despite economic uncertainty?
This is a very difficult prediction given the number of influencing factors in today’s market that are beyond our control. Throughout 2016/2017 the best interest rates in the market fell significantly to below 4%, largely due to increased competition in the market. The very best rates are now lower than some mainstream lenders SVR’s and represent the best value for money we’ve seen so far in the market.
With new big names joining the market, the level of competition in 2018 is expected to increase, but that may not result in further rate reductions. The reality of providing very long term fixed interest rate mortgages means there are limits to how low lenders can price. More so than the mainstream market, lenders have to price against a number of risks, including the costs of the no-negative equity guarantee and economic uncertainty, including house prices, which could affect the retail rates on offer. I am, however, optimistic about the future and for a great many people across the UK, accessing equity from their homes will be the right way forward for a better retirement.
FR: What new products or criteria would you like to see become mainstream in the market?
We have been working on a property refurbishment proposition pilot that we believe could help thousands of vulnerable customers living in terrible, sometimes hazardous, living conditions. Living in near-derelict properties, these individuals are often unable to qualify for a mortgage and end up being stuck in unsafe properties that they cannot or do not want to sell. Sadly, they have nowhere to turn to.
Our property refurbishment proposition aims to help these individuals by providing the funds to renovate their home and restore it to a decent standard, while also providing temporary accommodation to homeowners where necessary.
There are challenges, again we need to make sure that customers know exactly what they are doing by taking out a lifetime mortgage, but we think this is a great opportunity for the market to make a huge difference to some of the UK’s most disadvantaged. Following our pilot, we hope to make the scheme more generally available later this year.
FR: Recent research found that advisers believe early repayment options are the key to lifetime mortgage growth – do you agree with this?
Absolutely - we are a big believer in offering customers more options when releasing equity. Whether it be allowing them to overpay, pay interest where they can or allowing them to repay in certain life events, early repayment is key. It’s important our products empower customers to manage the cost of their mortgage and have greater flexibility and control.
FR: The FCA has set out plans to reintroduce retirement interest-only mortgages – is this a good idea and what would it mean for the market?
I broadly welcome the idea, but I am concerned about the potential for poor customer outcomes. The new ‘retirement interest-only mortgage’ proposals do not allow lenders to provide ‘interest roll-up’, which means the customer must continue to pay each month for their lifetime.
That might be ok in the first few years of retirement or if the customer holds a part-time job, but what would happen, for example, if they were no longer able to pay the interest in the latter stages of retirement? This could be because they have run out of income, a joint customer dies or goes into care, meaning a loss of income or care costs, or the customer no longer has the mental capacity to manage their finances.
It’s likely to be a very small market – customers with that level of income in retirement are in the minority and aren’t traditional equity release customers, who are usually cash-poor but asset rich.
FR: If you could see one headline about the retirement market in 2018, what would it be?
'Lifetime mortgages are now a £4 billion market'. Not so long ago no one would have believed it could grow quite so quickly. We have seen huge market growth in recent years and I would like that to continue in 2018. We all have a role in ensuring this happens but most of all lenders and advisers need to look after customers and ensure they continue to have the great outcomes that they receive today.
