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Lifetime borrowing: a maturing market

Analysis

Published: 30 November 2015 | Author: James Tatch

  • We are currently expanding our data on borrowing by older customers to provide fresh insight into this section of the market.
  • Data shows that the number of lifetime mortgages remains small - and their value is even smaller. But this is partly because the interest on these loans is usually rolled up and repaid when the borrower either passes away for goes into care. Depending on their life expectancy, borrowers may only be able to borrow at a relatively low loan-to-value ratio.
  • Older borrowers may take out lifetime mortgages, but there are other options. They can - and do - draw on the equity in their home through more conventional remortgaging.  But some borrowers may opt for a lifetime mortgage because they want to "draw down" the funds over a period of time, rather than taking the full amount at the outset.
  • In the future, we will have much more data on lifetime borrowing, which we will share with lenders that provide data to us.  This will give us a better perspective on a developing range of products for the UK's maturing population.

The UK is getting older.

That’s hardly news; pensions, receding retirement ages and, increasingly, mortgage lending to older customers, are now common topics. And the CML’s work programme on lending to older borrowers demonstrates the industry’s commitment to playing its part in this changing world.

Mortgage finance for this ageing population is a wide-ranging topic and there are many – often overlapping – ways in which the market may potentially cater for older borrowers. But, in general terms, there are two main areas of mortgage lending to older consumers. The first concerns broadly conventional mortgage products (whether for house purchase or remortgage) where the mortgage term may extend into the borrower’s retirement. The second area revolves around how older borrowers – often (but not necessarily) already in retirement – can access their housing equity which, for many, will be their largest financial asset in life.

In this second area, the UK market caters for such borrowers with lifetime mortgages. In simple terms, these allow a borrower to release equity from their home, and the loan does not get repaid until the borrower either dies or moves into permanent care. Generally, but not always, the interest does not get paid over the life of the loan, but accumulates and is repaid in full on redemption, when the property is sold.

Lifetime mortgages may be “lump-sum,” where the entire loan is advanced at the outset, or “drawdown,” an option under which the borrower can access the funds incrementally up to a total available balance.

Because lifetime mortgages are regulated, lenders report the details of each new lifetime sale to the Financial Conduct Authority in their product sales data (PSD). And the CML, via our own regulated mortgage survey (RMS), collects copies of this PSD from the vast majority of regulated lenders.

The size of the market

This article draws on our RMS data to tease out some of the key characteristics of the lifetime market.

The first thing to say is that lifetime lending is still a relatively small market segment.

Our data showed that last year 20,100 new lifetime mortgages were advanced, with a value of £1.1 billion. This is about 2% of the number of all regulated mortgages advanced in the year, but the amount advanced represented only 0.7% of the value of those loans.  Note, however, that the £1.1 billion of new lifetime loans is the value of the initial advances, and so excludes any subsequent drawdowns on such products after completion.

Estimates of the total outstanding lifetime book are less precise but RMS data indicate that, at the end of June this year, there were over 93,000 lifetime mortgages outstanding, with total balances (including drawdowns post-completion and any rolled-up interest) worth at least £6.1 billion. This equates to 1.2% of the total value of outstanding regulated mortgages.

Options for older borrowers

Since 2005, lifetime lending has accounted for between 1% and 2% of the total regulated market by volume. But a small share is hardly surprising, given that lifetime mortgages are currently available only to borrowers aged 55 and over.

Chart 1: New lifetime mortgages, UK

Chart showing new lifetime mortgages UK

Source: CML Regulated Mortgage Survey

Download the data

More pertinently, lifetime borrowing is not necessarily the only mortgage option for older customers. In the first three quarters of 2015, just under half of all lifetime loans were made to borrowers aged between the minimum age of 55 up to the age of 69. But, as Chart 2 shows, traditional mortgage products (regulated house purchase and remortgaging) are more common than lifetime mortgages for these borrowers. It is only at the age of 70 and beyond that lifetime products really dominate the lending landscape.

Chart 2: Lending to borrowers aged 55 and older, 2015

Chart showing lending to borrowers aged 55 and older, 2015

Source: CML Regulated Mortgage Survey

1. Data cover Q1 - Q3 2015

Download the data

This is partly linked to the age-specific underwriting criteria for lifetime borrowing. The amount which a lender is able to advance for a lifetime loan relates to the projected life expectancy of the borrower. Younger borrowers may borrow less relative to their property’s value (that is, they may borrow only at a lower loan-to-value ratio) to ensure the total accumulated interest on repayment will be covered by the property sale. An older borrower may take out more relative to their property’s value because the mortgage is expected to be repaid sooner. So, depending on the size of loan required, a lifetime mortgage may not always be suitable or those younger cohorts, even if they pass the basic minimum age and loan-to-value criteria.

But it’s probable that this is only part of the story; in a world where people are living and working longer, and building families later in life, younger lifetime-eligible consumers (those in their 50s and 60s) are still quite likely to be looking to borrow either to buy a house or to remortgage on to better terms – like any other borrower in the wider mainstream market. Equity withdrawal, which is the essence of a lifetime loan, is one reason for borrowing, but not necessarily the main one.

Remortgaging or lifetime borrowing?

When compared with only remortgaging where equity is withdrawn, we see that lifetime borrowing plays a much more prominent role. Lifetime loans account for 53% of all such equity release mortgages to borrowers aged 55 and over, and 77% of those to borrowers aged 60 and over. And, within this, lifetime becomes a prominent component of total lending at a much earlier age.

Chart 3: New lending where equity released, borrowers aged 55 and over, 2015

Chart showing new lending where equity released borrowers 55 and over 2015

Source: CML Regulated Mortgage Survey

1. Data cover Q1 - Q3 2015 

Download the data

Overall, the typical loan size for a lifetime mortgage in the first three quarters of 2015 was £58,000, far lower than the average £161,000 for the regulated market overall in the same period.

Again, though, we need to consider that lifetime mortgages are a form of equity withdrawal, so it is more relevant to compare lifetime loans with the equity withdrawal element of remortgaging.

Withdrawing equity

On this basis, the typical value of equity withdrawn by borrowers aged 55 and over who are remortgaging (that is, those who could also qualify for a lifetime loan, at least on the basis of their age) was £68,000, closer to the £58,000 typical lifetime loan size.

This finding holds within each age bracket and in most regions, with lifetime loans typically around 20% lower than the amount of equity withdrawn through remortgaging.

But why should lifetime loans be lower than the equity accessed by the same sorts of borrowers in the mainstream market? We believe the answer lies in the structuring of lifetime products.

Although loan sizes for lifetime borrowing appear lower than the broadly equivalent withdrawal of equity through mainstream remortgaging, many lifetime mortgages are currently taken out are drawdown products. Because interest accrues only on each instalment after it is accessed, drawdown may often be a more flexible and/or cost-effective option for the borrower than either lump-sum lifetime borrowing or the more traditional withdrawal of equity through remortgaging.

Lump sum or drawdown?

Figures from the Equity Release Council indicate that about 60% of lifetime borrowing in the third quarter of this year was through drawdown products.

We can infer some detail on drawdown products from RMS data., But this is new data from 2015 and still very much in its infancy, so we avoid too detailed an analysis here. However, looking at those lifetime loans in 2015, where the total amount of borrowing available is greater than the initial loan reported (therefore implying a drawdown product), the average initial loan is £48,000, with an additional balance of £38,000 available for subsequent drawdown. And for those loans where the data suggest a lump sum lifetime mortgage has been taken out, the typical initial loan size is significantly higher, at £62,000.

So on deeper investigation, it appears that lifetime is not necessarily the lower ticket lending, compared to the equivalent in the mainstream market, that a cursory reading of the data might suggest.

Expanding our data to provide more insight

Our data can now start to provide greater detail and context for a segment of the market that, where it is suitable for a consumer’s circumstances, could offer more flexibility than a standard equity release remortgage.

We will shortly be releasing a range of data on our website looking specifically at lifetime lending trends. This will be available to those lenders that provide their own lifetime lending data to us in their PSD. We look forward to using our improved data on this segment of the market to draw out further insight into a developing range of products that speak to the UK’s maturing population.