Older borrowers: new approaches, old barriers
Published: 2 March 2017 | Author: Bernard Clarke
Delegates attending yesterday’s CML retirement borrowing conference were given a preview of preliminary findings from a research report we are publishing later this spring on the provision of advice for older borrowers. The circumstances in which people in this group find themselves can vary significantly depending on a wide range of factors, including their income and housing equity.
Building on our earlier research into the reality, perceptions, projections and potential of retirement borrowing, we have commissioned researchers Jackie Wells and Associates to undertake our new study into the availability of advice for older borrowers. Promoting the right kind of advice is seen as crucial in helping consumers make informed decisions about their financial options, and the full research report published later this spring will look at:
- the differing needs for advice among older people;
- demand for advice from borrowers aged 55 or older;
- how readily available it is to people in this age group;
- the provision of financial services for older people – and how the market has evolved;
- experiences and outcomes for consumers;
- what might be learned from other markets and products; and
- what might be done to develop and improve the provision of advice and financial products for older borrowers.
Five types of older borrower
In order to help understand the widely differing circumstances of people in this group, the researchers have identified five broad consumer types. They believe that most consumers fall into the three middle categories, but are looking for more data. Within each category, borrowers may share many similar characteristics. But there are major differences between the categories in terms of access to income, equity and borrowing opportunities.
- The over-stretched may be struggling with borrowing commitments made in the past, and may now find it difficult to re-pay their loan, or to re-mortgage. Some may be in arrears and also managing credit card debt. Equity release is unlikely to be an option, and some may be better off selling their home, and renting with support from the benefit system. Lenders may already be offering support by helping them deal with arrears or by extending the mortgage term, and they may also need to point the customer towards more general debt advice.
- The extended may be able to service existing loan commitments in the short to medium term, but may need to carry on working in “retirement,” and might also need to borrow in the future. Some in this group may be interest-only borrowers, perhaps facing a shortfall on their repayment plan. They could also be considering releasing equity, or selling the property as a repayment mechanism.
- Those adjusting to life in old age may be thinking about moving to a home better suited to their needs, modifying their existing property, or paying for care and support. They may currently have only modest loan-to-value borrowing needs that could be met through a mortgage or through equity release, but may need to borrow more in the future.
- Those who are managing well in retirement, but who may need to top up their borrowing at some stage. They may be considering a mortgage or equity release to fund luxuries like holidays or to pass on money to their children.
- Tax planners usually have an adequate retirement income and may be considering options like managing their pension as a means of sheltering wealth. They may be planning to draw on housing equity to fund luxuries, to pass on money to their children or to reduce inheritance tax. They may also already be getting specialist help from an adviser or wealth manager.
Changing attitudes to home-ownership
In another section of the forthcoming report, the researchers reflect on how the experience of buying a home has evolved over time. There have also been significant changes to the potential for drawing on housing equity.
For example, in the early part of the last century, home-ownership was much less common than it is today – with many more people on average incomes only able to rent their homes. There was also often only modest provision of pension income, so it was more common for people to continue to work until they were unable to do so, with those in old age relying on their family or on limited state support.
By the latter part of the 20th century, owner-occupation had expanded and home-ownership had become a source of both security and status. At that stage, the pattern was for most owner-occupiers to buy as early as possible in adult life, and pay off their mortgage on a 25-year term, long before retiring. Older people would then hope to live in their home debt-free on the income from a pension, and pass on the value of their property to their families.
Today, owning a home remains a source of security and status, but many people are now only able to consider buying later in life, and may retire before paying off their mortgage. In old age, their home may also become an asset to be drawn upon to supplement a modest retirement income. Any residual value left in the property may be passed on to family members, either while the owners are still alive or upon their death.
In the future, the researchers foresee that housing affordability could mean that people rent for even longer, and may only buy if it is possible to do so later in life. Owner-occupiers will pay off their mortgage if and when they are able to do so with repayment potentially extending beyond retirement age, and some may never own their home outright. This may contribute over time to an increased blurring between renting and home-ownership.
Four key issues
At this week’s conference, the researchers presented some preliminary findings, which will be tested further as they continue to work on the project and develop their conclusions. At this stage, they have identified four key issues for policymakers to address if they are to widen the choices for older borrowers:
1. The reputational risks in lending – and providing advice – to older borrowers. The risk of future payment problems for older borrowers may be greater, given the likelihood that they may experience sudden and significant changes in their circumstances. For advisers, the risks in dealing with more vulnerable consumers may not be reflected in the fees they receive.
Some firms may also be concerned by lingering historical perceptions of equity release, and worries that these may extend to the mortgage market. Concern about allegations of poor treatment of older borrowers can be a powerful deterrent. But lower interest rates, the development of new and more flexible products, and market entry by large brands may offer potential to overcome some of the risks.
2. Product silos and a lack of flexibility. The markets for mainstream mortgages and equity release products remain distinct. Large, mainstream lenders have tended to take a cautious approach, and their systems may be slower to change. Smaller lenders can be more flexible, but may vary in the approach they take.
This can produce a lack of consistency in lending beyond certain age thresholds, in judging income jointly and individually, and in the approaches to pension freedoms, repayment mechanisms, state benefits and forbearance. All of this can mean that there is no obvious “shop window” in which consumers can consider and compare all the options.
3. Developing a clear understanding of the needs and circumstances of older borrowers. The market is evolving, but understanding the income and expenditure trajectory of older borrowers – and how this relates, for example, to the benefits system – is complex. Helping older customers understand for themselves how their circumstances may change presents challenges, and for firms the conversion rate is often lower than for younger borrowers.
As people grow older, their own needs may evolve. Their circumstances may become more complex, while they also become more vulnerable. And older people now often have to make complex, inter-related decisions about pensions, wealth management, mortgages and equity release. Meanwhile, providing holistic advice can be difficult for a variety of reasons, including cost, complexity and the requirement for adviser qualifications extending across a range of subjects.
4. Regulatory silos tend to reinforce the boundaries between mortgage lending and equity release, with different conduct rules and sets of permission. Professional qualifications are linked but separate, and do not encourage the holistic treatment of customers. Firms operating in different markets may also have to fulfil different prudential requirements.
Work on our research project will continue this spring, and the final report will contain more detailed conclusions. But our decision to commission this research reflects a growing recognition that older people could and should have a wider range of options than income poverty. The market needs to develop much further, and a wider acceptance of the sale of the property as a repayment method may be necessary.
More work is needed on the provision of advice, product development and underwriting. The industry also needs to build more data about the retirement borrowing market, and develop a better understanding over time of the impact of wider pension choices.