CML data sheds new light on lending into retirement
Published: 1 April 2014 | Author: Bernard Clarke
Our recent conference focusing on lending into retirement sought to provide some new insights into recent developments in what is a complex area for lenders, policymakers, commentators and consumers. Today, we look at what our data shows about lending to older customers, and explore some of the issues, including:
- The increasing number of people aged 65 or more who are paying off their mortgage.
- What the data shows about how people are now typically older when buying their second (or third) home – in effect, taking longer to move up the housing ladder – and more likely than in the past to take out a loan for a term of longer than 25 years.
- How the consequences of borrowing into retirement will vary considerably for individual borrowers depending on their circumstances.
- How the picture is made more complicated because of uncertainty about retirement plans and funding. The default retirement age has been phased out, and the state pension age is rising. But it now varies depending on date of birth. Most people are also able to work as long as they want to, and the decline in pensions with defined benefits adds to uncertainty about retirement plans and incomes.
- How the recent announcement in the Budget of more liberal pension rules and the relaxation of the requirement to purchase an annuity have made the picture more complicated. The potential impact on borrowing by older customers is not immediately clear, and will require further consideration.
- How, against a less certain backdrop, firms want to help consumers meet their aspirations, but must continue to lend responsibly. Lenders are also, of course, required to operate within regulatory requirements and legislation on age discrimination.
What the regulator says
Lenders are currently switching to new rules coming into effect later this month as a result of the mortgage market review (MMR). The rule changes are significant for lenders and consumers, but they do not impose limits on lending into retirement. The Financial Conduct Authority (FCA) has said that it does not want to stop older customers from getting mortgages, as long as they are affordable.
When considering whether to advance a loan, lenders must take into account any future changes in income and expenditure of which they are aware, or should reasonably be aware. Firms are also able to take into account a borrower’s expected retirement age where this is known. The FCA has suggested that firms should apply more scrutiny to, and request more evidence of, income the closer the customer is to retirement. But it has not provided specific guidance, so it is a matter for individual firms when setting their lending policies.
While the Equality Act 2010 imposes a general ban on age discrimination, it permits an exception for the provision of financial services. Firms that provide financial services are therefore able to continue to use age banding and limits, and to specialise in products for certain age groups.
However, if a firm undertakes a risk assessment relating to age, the exception from the ban on age discrimination only applies if it fulfils certain requirements. It must base the risk assessment on information about the customer’s age that is relevant and comes from a source on which it is reasonable to rely.
The ageing customer base
One of the consequences of the bulge in post-war “baby boomers” born in the years 1946-64 is that the UK now has an ageing population. There are currently 11.1 million people aged 65 or older, a number that has grown by 1.6 million over the last decade. And we are likely to see an even more rapid increase over the next 10 years. By 2023, one-quarter of all adults will be aged 65 or older, and their profile will be shifting inexorably towards being very old.
Table One: UK adult population be age range, millions
These changes will have implications for lenders because borrowing activity declines sharply with age. Data from our regulated mortgage survey (RMS) shows that borrowing by age band peaks for those in their 30s, with those in this group twice as likely to take out a mortgage as those in their 50s.
The RMS provides some other important insights into lending to customers in different age groups. The survey was only launched in 2005 but, even so, it shows that there have been some significant changes to trends in lending to those aged 65 and over (see Chart One).
Chart One: Mortgage lending to those aged 65 and over, by volume and value
Lending to those aged 65 and over accounts for only a small proportion of regulated mortgage lending, and one that has declined steadily since 2007. The size of advance to those in this age group is also typically much smaller than average. Last year, borrowers in this group took out fewer than 16,000 loans, worth around £1.3 billion, which accounted for just 1% of new lending.
Perhaps not surprisingly, lifetime mortgages feature prominently in lending to people in this age group. Even though our data does not fully capture the lifetime mortgage market, this type of product accounts for nearly 40% of all lending to those aged over 65.
For the very small amount of lending to the very old – customers aged 85 and over – the proportion accounted for by lifetime mortgages has grown since 2007 and comprised 90% of the total last year. Right to Buy purchases also account for a higher proportion of loans taken out by older customers.
While the RMS tells us a lot about new lending activity, data from the English Housing Survey gives a breakdown of the proportion in each age group that is currently paying off a mortgage. As we might expect, Chart Two confirms that only a small proportion of all those aged over 65 (around 4.5%) is paying off a mortgage, and very few of these are aged over 75.
The data does, however, show some interesting changes over time in the profile of those holding mortgage debt and, in particular a decline in the proportion of those aged 25-44 with a mortgage (with the decline more pronounced among those aged 25-34). These shifts in the lending profile over time largely reflect the sharp fall in house purchase activity since the credit crunch, after which the number of first-time buyers halved.
Chart Two: Adults buying a home with a mortgage in England, % by age
Looking at what our own RMS data and the English Housing Survey show, the conclusion is that the number of new mortgages taken out by those aged 65 and over is modest and declining. However, the stock of mortgages held by borrowers in this age group is larger (at around 4.5% and pushing higher) than their share of new lending, which amounts to only a little over 1%.
The increase in the number of loans extending into retirement has been driven partly by a combination of those taking out a mortgage getting older, and some customers taking out loans with longer repayment terms. Although the average age of a first-time buyer has more or less remained constant since 2007 (fluctuating only slightly between 29 and 30), there has been a tick up since 2008 in the average age of both movers and those remortaging.
Looking in more detail at the figures, there has been a notable decline in the proportion of very young first-time buyers (those aged under 25) since 2006, and an increase in activity by those in their late 20s and early 30s. The data also shows that the proportion of first-time buyers taking out a mortgage with a term of more than 25 years has increased from around 30% in 2006 to around 50% today. This may partly reflect the reality that today’s first-time buyers expect to retire at an older age than their parents.
Chart Three: The number and proportion of mortgages extending to age 65 and beyond
In putting together the data in Chart Three, we have adopted the same simplified approach as the Financial Services Authority (FSA) in its assessment of mortgage borrowing by age. The FSA/FCA adopted as a common yardstick for loans extending into retirement any that are still being paid on or beyond the age of 65. The section of Chart Three extending beyond the red line shows what has happened in the 18 months since the regulator reported on this.
Chart Three shows that both the number and proportion of loans extending into retirement has increased in the last three years. This suggests a rise in the proportion of mortgages being paid off in retirement – but the proportion of those paid off just a few years beyond retirement age is rising. Of all loans extending into retirement, the proportion paid off by the age of 70 has increased from a little over 65% to 80% today.
Our data shows that the number of people borrowing into retirement has grown in recent years, partly because some customers are taking out loans later in life. There has also been an increase in the number of those taking out mortgages for longer terms. But the picture has become less clear with the upward drift in state pension age, and the growing expectations that people will retire at a later age than before.
Following the announcement by the chancellor of more liberal pension rules in his recent Budget, there has been a lot of speculation that one result could be an increase in housing market activity – and borrowing – by older customers. At this stage, however, it is too early to predict how the market may be affected by the change of rules.
Lenders continue to judge the affordability of mortgage applications on an individual basis, and to uphold rules requiring them to take into account the effect of foreseeable changes in circumstances, including likely retirement age. Firms want to help customers, including those who want to take out lifetime mortgages to draw on equity in their property, as long as they are affordable.
In offering loans to borrowers that may extend into retirement, lenders are dealing with the aspirations and needs of people in very different circumstances. They must balance all of this with regulatory and legal requirements, and the overarching need to lend responsibly and treat customers fairly.