Published: 23 April 2015 | Author: Bernard Clarke
Last month, our director general Paul Smee set out his views on the role the CML intends to play as a forum for addressing the complex issues raised by lending to older borrowers – customers who, in some cases, may be repaying at least part of their loan after they reach retirement age. Today, we are able to give more information about how we plan to take this work forward in practice.
A year ago, we published an article showing the extent to which borrowers are repaying their mortgage beyond retirement age – and today we are able to update some of the data we presented then. Chart 1 shows that, while there has been no dramatic change in the trends we identified a year ago, both the number and proportion of borrowers paying off some of their mortgage beyond retirement age has continued to rise.
Chart 1: Number and proportion of mortgages extending to age 65 and beyond
It is important to understand, however, that just because someone is paying off part of their mortgage beyond the nominal retirement age of 65, it does not imply that they are experiencing payment problems. The overwhelming majority are paying off their loan successfully and fully in line with their mortgage commitments. For many of these borrowers, their monthly payments are modest relative to their incomes.
And a large majority of mortgages being repaid by those aged 65 or over are near the end of their term. Most are fully paid off before the borrower reaches the age of 70.
As our chairman, Moray McDonald, said in a wide-ranging speech to guests at the CML annual lunch last week, the circumstances of people at this age vary considerably. For the majority of those who still have a mortgage, their circumstances are not a barrier to continuing to fulfil their loan obligations. As Moray McDonald said:
"We really need to crack lending into retirement. By just after the end of the new parliament in 2023, 24% of all adults will be aged 65 or older. The regulations here need to be fixed. We need to be sensible about the factors we take into account when assessing affordability, and we need to stop penalising people because they won’t live forever."
The key issues
As Paul Smee said a month ago, our members have now agreed that we should set up a group to undertake a wide-ranging project that we expect to last at least until the end of this year. At the same time, this work could potentially extend over a wide range of issues, so it is important for our group to focus on the right questions for the industry. We need to get the terms of reference right, so today we set out the areas on which we think the work of our group needs to focus:
- Product development. In a recent speech, Linda Woodall, of the Financial Conduct Authority (FCA), summed up at least part of the challenge. Do we need new products, she asked, to “bridge the gap” between traditional mortgages and lifetime loans? Our group will look at this important question and consider the potential for new products that can meet the needs of older borrowers.
- What, for example, is the potential for a product that allows an older borrower to carry on making repayments while they can afford to do so, but then converts to equity release triggered by a life event for the customer? Are there other options? And what are the challenges in providing advice during the sales process, or at other key stages in the cycle of the product?
- The role of regulators – and the ombudsman. Our group will look at the extent to which the potential for lenders in this area is shaped by the requirements of the FCA, the Prudential Regulation Authority (PRA), the Financial Ombudsman Service and others.
- One area the group will consider is whether there is conflict for lenders between the FCA’s call for firms to take “a proportionate and common sense approach” to lending to older borrowers and the conservative capital requirements imposed on them by the PRA.
- In her recent speech, Linda Woodall said the FCA was sympathetic to the view that lenders were getting mixed messages, and that the FCA was keen to help if possible. She recognised that there would be “a number of perfectly creditworthy existing mortgage borrowers who would also not be able to pass the new affordability tests.”
- Lenders do want to lend to creditworthy customers, within the constraints imposed by regulators. But they also have to consider very carefully the consequences – for the customer and for themselves – of agreeing to lend to older customers who later, when they have only a limited income (and potentially other complicated circumstances) find they unable to keep up with their loan commitments.
- As we have seen, the number of those aged over 65 and repaying a mortgage is slowly growing. The FCA recognises that lenders are not able to predict exactly what borrowers’ future pension incomes might be, or whether they will carry on making pension provision. There are also complications like additional unknown spending to cover the need for things like care in old age, or how affordability may be affected if one half of a couple dies.
- We welcome the FCA’s decision to open its doors to those looking to develop innovative approaches that are not explicitly covered by current regulation. This may prove useful in pursuing our work.
- We have pointed out that where lenders do have age limits, they also have policies permitting exceptions and will often lend beyond an 'age limit' where they are satisfied that, in the individual circumstances of the case, the loan will remain affordable.
- Pension reforms. Our group will also seek to understand more clearly how mortgage lending may be affected by the recent pension changes.
The effects of pension reforms will not be the same for all borrowers, but allowing individuals to draw from their pension funds is likely to have significant consequences for the lending industry over time.
The way forward
The issues raised by this work are wide-ranging, so the group will agree a set of themes and topics on which it will focus initially, while continuing to keep the scope of its work under review.
Issues that we believe should fall within the remit of our group of lenders include, for example, the implications of younger borrowers wanting to address the challenges of affordability by extending the length of the mortgage term, as well as the possible impact on buy-to-let lending of reforms to pensions rules.
We also recognise that this issue affects other strands of lending activity. So, work on product development could, for example, have implications for interest-only borrowers coming to the end of their term. We therefore anticipate that the group of lenders looking at these issues will work in tandem with other CML working groups and panels, including those focusing on interest-only and buy-to-let lending.
For example, the work of those directing the provision of specialist housing for older people is likely to have a bearing on our deliberations. We will also work in tandem with government and regulators. And we envisage that the FCA’s innovation hub may have a contribution to make to our work on product development.
As Paul Smee said in launching this project just over a month ago, the timing is right. Undoubtedly, the issues are complex, and the options will not be same for all consumers. But we sense there is now a groundswell to address these issues. Our group is therefore ready to take up the challenge – and looks forward to working with individual lenders, consumer groups, regulators and government as we seek to address challenging issues confronting the industry.