Older borrowers - debt mountains and equity peaks!
Published: 27 October 2016 | Author: James Tatch
We all know that the UK is living longer. By 2030, there are projected to be between nine and 10 million more people aged 65 and over than there are today, but only around three million more aged between 20 and 64.
We are not just living longer, but working, playing and spending money for longer. But will we find time for climbing mountains, too?
We have recently analysed our data on the level of outstanding loans in the mortgage stock to take a look at older borrowers’ housing “balance sheets.” Our regulated mortgage survey covers outstanding mortgages worth some £979 billion in June 2016. This equates to some 91% of the total owner-occupied mortgage stock.
The 9% of owner-occupied mortgages not included in our data are predominantly unregulated loans. While we do not have detailed data on this small minority of loans, they will mostly be older mortgages. Broadly speaking, these mortgages will therefore be held by older borrowers and have lower levels of outstanding debt, both in absolute terms and relative to property value.
For most of us, the amount we need to borrow to buy a house is sizeable. When we are younger and at the beginning of our housing journey, this debt can seem daunting. In some ways, a mountain of debt is an unhelpful metaphor. But we all need to climb up one side of this mortgage range before we can see over the debt and start to really consider the free (unmortgaged) equity that we have accrued.
What the charts show
Chart 1 shows mortgage holders’ debt and free equity at different ages. And, in fact, it does resemble a Lake District panorama, albeit one in CML colours.
It is important to keep in mind that this does not show the path of any particular borrower’s debt and equity over their mortgaged life. Rather, it gives a snapshot of the current mortgaged population (excluding lifetime mortgages), who have bought different properties at different times over 20 years or so. And it gives a clear illustration of how that equity pile progressively dominates the shrinking mortgage debt as we move through life.
It makes for a striking graphic, but what does this tell us?
Chart 1: Mortgage debt and equity by current age, June 2016
Looking at the foreground we have that debt “mountain” and, behind it, an initially distant equity peak. What we can see is that those aged 38 hold the most debt – £147,000 on average. And, through to the age of 46, borrowers continue to hold more mortgage debt than the equity they have built up.
As we move further on up the age scale, we can see that the pile of mortgage debt falls further away, and is increasingly overshadowed by a second peak of free housing equity. By the age of 60, the average mortgage holder has a debt of £90,000 but free equity of almost £150,000.
Critically, this shows the typical situation of those who have a mortgage at each age and, of course, by the time they hit 60, many borrowers have already repaid their mortgage. To provide some context, those aged over 60 make up 21% of the total UK population, but account for only 9% (around 600,000) of mortgage holders. But they hold a much larger 14% of the total equity of the mortgage-holding population.
So, we can start to see a detailed picture of the equity held by mortgage holders – and both the opportunities and challenges this presents in later life when that equity holding becomes bigger.
Repayment and interest-only mortgages
It is useful here to consider two types of mortgage – repayment and interest-only. Each of these has not only a different profile for how the balance of debt against equity changes over the life of the mortgage, but also for the absolute amounts of equity held. And both of these affect how borrowers might potentially be able to use that equity, should they wish to do so.
Charts 2 and 3 re-draw the debt and equity panorama shown in Chart 1, but separately for repayment and interest-only mortgages respectively. And they show very marked differences.
Chart 2: Repayment mortgage debt and equity by current age, June 2016
Chart 3: Interest-only mortgage debt and equity by current age, June 2016
The landscape for repayment mortgages is, essentially, a more accentuated version of the overall picture, with the debt mountain reaching a peak in the late 30s, with borrowers from the age of 45 onwards having increasingly more equity than they do mortgage debt. By the age of 60, borrowers have around £53,000 of debt and £135,000 of free equity.
For interest-only borrowers, however, the landscape looks quite different. Free equity only starts to exceed outstanding debt for borrowers as they approach the age of 60 – an age when the average repayment borrower already has around £80,000 more in equity than in debt.
The scale of equity holdings
In itself, this difference has no particular significance. By definition, interest-only loans do not amortise, and so have a slower accumulation of equity than an equivalent repayment mortgage. And, assuming the borrower has made sufficient provision to repay the capital initially borrowed, the final equity stake at maturity will be the same – 100%.
But beyond the different profile of peaks and valleys, another key difference is in the scale of the mountains. Interest-only borrowers typically have both higher debt and equity than those with repayment mortgages. For example, the average 55-year-old with a repayment mortgage is now well over the first peak and has almost twice as much equity as mortgage debt, while their interest-only peer has only just reached the point where their free equity is as much as their debt. In absolute terms, however, the average 55-year-old interest-only borrower’s free equity is £177,000, compared to £127,000 for a repayment borrower.
In aggregate, borrowers aged 50 and over hold 28% of mortgage debt but 43% of the free equity. That translates to some £400 billion of free equity for these older borrowers.
Although we do not have the same detailed data for outright owners, a rough estimate using data from HM Land Registry and the English Housing Survey suggests that mortgage-free home-owners aged over 50 hold comfortably over £1 trillion of equity.
Equity and opportunity
Our data do not tell us anything about the incomes of these borrowers, either current or projected into retirement. It is likely that, in many cases, those with more housing equity also have higher incomes, and so perhaps have less need to draw upon that equity. But, where this is not the case, equity held by older borrowers presents both an opportunity and a challenge.
And this is perhaps the key point that emerges from this analysis: older borrowers tend to be asset-rich with low-geared debt, yet they often have a relatively narrow range of opportunities. Nearly half of the total equity held by borrowers sits with those for whom a mortgage with a typical 25-year term would generally see them well past the state retirement age. Lifetime mortgages offer a route to access their equity for some, but the prevailing loan-to-value (LTV) and age criteria restrict the amounts for borrowers at the younger end of this spectrum.
LTV is a key consideration for non-lifetime mortgage lenders too, as it influences whether and how much they could lend to a borrower. But, for borrowers looking to use mortgage finance to unlock housing wealth, the absolute level of equity is perhaps more pertinent. And interest-only borrowers, although they are more constrained by LTV measures, have more equity available – if it can be unlocked in a sustainable, affordable way.
Recognising the needs of a longer-living population, the mortgage industry has moved towards relaxing age restrictions. According to Moneyfacts, in 2014 5% of all residential mortgage products (excluding lifetime mortgages) were available for terms that would take borrowers over the age of 75. But at the start of 2016 this had risen to 17% and, by the end of September, 40% of products were available for borrowing to this age.
But age limits are only art of the equation.
Lending that extends beyond likely retirement age comes with challenges, including (for non-lifetime loans) the regulatory requirement to assess the ability to repay both before and after retirement. Mortgage lending rules require that firms to take “a prudent and proportionate” approach to assessing retirement income, but provide few specifics as to how this might be done. And pension freedoms have now made the task of assessing retirement income more problematic, both for borrowers and lenders.
The waiver introduced by the Financial Conduct Authority to relax affordability requirements for interest-only products that become interest roll-up at a later stage is a helpful step. But later-life products that fully bridge the gap between conventional repayment mortgages and retirement mortgage products have yet to be developed meaningfully.
Potential for new products
For a progressively longer-living population, 60 may be the new 50, if not the new 40. A natural part of this welcome progression is that there will necessarily be more and more of the mortgaged population in this “younger older” age bracket. And they will want to continue to access mortgage credit for a variety of reasons.
On a micro level, facilitating more flexible ways to borrow and draw on housing equity throughout life is likely to be attractive to many. And the same flexibility could offer wider social benefit; for example allowing more freedom for “empty nesters” to downsize earlier in life, when they still need mortgage credit to do so but when retirement on the horizon could otherwise prove an obstacle. Innovation that removes barriers to a more efficient use of the UK housing stock in this way could have effects throughout the housing market for everyone from first-time buyers through to last-time sellers.
What comes across clearly is that there is around £400 billion of free equity held by those aged over 50, eclipsing the aggregate debt these borrowers hold. So, there are potentially significant gains from developing mortgage products that allow borrowers to access this equity flexibly, in ways that complement our lengthening working – and playing – lives. The right kinds of products could help unlock finances for a sizeable, growing, but still partially unserved section of the UK population.