No stock answers in CML debate about older borrowers
Published: 19 March 2015 | Author: Paul Smee
Long ago, life seemed so simple.
Working lives and mortgage lives were somehow calibrated. Mortgages were for 25 years, full stop. No-one borrowed into retirement because that was not what anyone did. The validity of the argument was self-evident. In a time of defined benefit pensions and pretty standard retirement ages, that was what happened.
But the past is a distant country and we are now in an era of much less well-defined life stages. Retirement is a moveable feast (and, for many, somewhat less of a feast as pensions are increasingly defined contribution and more subject to the vagaries of the market). Pension pots are shortly to be more accessible to the pensioner. People are entering the mortgage market later and mortgage terms are extending. Borrowing into retirement is a natural concomitant. All that is before we inject the added complication of those ending term on interest-only mortgages with a repayment vehicle which proves inadequate to its purpose.
Regulation and retirement
Of course, regulation also extends into retirement. Lenders will have to satisfy themselves that their borrowers have the necessary income with which to service a loan; and that they have the necessary capital to underpin their lending, given the extremely conservative approach of the Prudential Regulation Authority to the subject. In both cases, the answer may be ‘yes’ so it is encouraging to see Linda Woodall’s latest comments in her speech to the Mortgage Finance Gazette conference commenting that all the Financial Conduct Authority (FCA) expects in these circumstances is "a proportionate and common sense approach". It is good to see that the FCA is tackling head-on the myth that lending into retirement is somehow below the regulatory salt.
However, Linda also used that speech to set out a challenge. “Is the traditional mortgage the right product or do new products need to be designed to bridge the gap between a traditional product and a lifetime product?”
Rising to the challenge
I want to take up that challenge. The CML board has agreed that we should bring together a group of our members to look at the landscape of borrowing into retirement and identify what obstacles exist to its (safe) development and seek ways of addressing them. Their work will start very soon.
We will have to factor in the new pension landscape; and the ramifications of interest-only mortgages. We will have to consider how traditional mortgage and equity release products can relate to each other; at the moment, there feels like something of a clunky disconnect between the markets – certainly if you are a consumer. There are reasons why this has occurred – different regulatory regimes, different types of advisor, different product heritage – but perhaps we now need to look to deliver something more joined-up.
We will come up with a vision and some concrete proposals later this year.
Once lenders have got their ducks in a row and we have defined the agenda, I would hope to involve a wider audience as I appreciate how many different groups have an interest in this subject.
And, of course, we do not want to work in isolation. There are many technical aspects to the subject of borrowing into retirement where leadership needs to be shown by the industry itself. But it has to be set into the wider context of an ageing society and a changing approach to older age, especially employment in older age. It will also have to tie in to evolving debates on subjects such as appropriate accommodation for older age-groups and some vexed questions about inter-generational transfers of wealth.
The way forward
It is a broad canvas but an important one and I hope that the industry will show that it can contribute to the solution and the right way forward.
I feel that the timing is right. Last month’s headline report from the English Housing Survey revealed that the number of those who own their homes outright (7.4 million) now exceeds the number of mortgage holders (6.9 million).
There were other striking statistics from the survey on tenure in different age groups. Among the young, renting privately is growing rapidly, while owner-occupation is declining. Almost half (48%) of those aged 25-34 now rent privately, and owner-occupation in this age group has fallen from 59% to 36% in a decade.
In the generation above, mortgagors are predominant, with 63% of those aged 35 to 54 paying off a loan. Meanwhile, among those aged 65 or over, 77% are home-owners, and 4.5 million own their property outright.
That is a lot of housing stock. It needs to be used well and lenders need to be a channel through which it can be used well. This is a very important agenda for our times.