Published: 10 December 2015 | Author: Bernard Clarke
Some cases on which the Financial Ombudsman Service (FOS) has recently ruled illustrate some of the complexities for lenders in dealing with the issues raised by retirement borrowing. The individual circumstances of older borrowers vary significantly, which makes decision-making in this area more complicated for borrowers, lenders, regulators and policymakers.
Those differences in individual circumstances extend across every aspect of life for older people although, in aggregate terms, the elderly are wealthy. A report published by the Resolution Foundation estimates that 58% of national wealth is held by those aged 55 and over, much of it in property assets and pension sayings. But holdings of, and access to, wealth among individuals vary considerably.
In one recent ombudsman case, a retired woman wanted her lender to convert an interest-only loan on her home into a lifetime mortgage. After considering her circumstances and concluding that her pension income was sufficient to cover the monthly interest payments, the ombudsman ruled that it was acceptable for the loan to be switched into a lifetime mortgage. In its ruling, the FOS said the term of the interest-only mortgage should be extended indefinitely, with the capital repaid when the woman’s home was eventually sold.
Retirement realities, perceptions and potential
A report we published earlier this month, Retirement borrowing: reality, perceptions, projections and potential, showed how complicated and inter-connected the issues often are in developing the rights kinds of products and policy approach in extending secured credit to older customers. The report concluded with a series of suggestions for lenders and others to consider with the aim of making it easier to help older borrowers in a variety of circumstances, and to deliver outcomes that help them fulfil their wishes where it is possible to do so.
One of our suggestions – that the Financial Conduct Authority (FCA) should consider changing some of the mortgage conduct of business (MCOB) rules to make it clearer that lifetime mortgages can be an acceptable repayment strategy for interest-only borrowers – may have been particularly useful in the case of the retired woman (above) that came before the ombudsman.
Rules shape product development…
It may be that all that is needed is greater clarity in the rules and guidance to remove doubt for firms, and make it clearer that they can agree to converting an interest-only into a lifetime mortgage in appropriate circumstances.
Greater clarity would not only help borrowers and lenders, but might also encourage the development of products with a built-in provision for converting interest-only into lifetime mortgages.
Our report has been published in a climate in which retirement borrowing is rising up the political agenda. Lifestyles are becoming less predictable for all age groups, with less clearly defined patterns and stages of life than we saw in earlier generations. And within this general context, our report sets out to consider:
- the challenges for lenders operating in a new, liberalised pension landscape;
- how traditional mortgage and equity release products might relate to each other, from both industry and consumer viewpoints;
- the wider need for advice about the funding of – and borrowing in – retirement, now and in the future;
- the roles of the ombudsman and regulators, including the extent to which what lenders are able to do to help borrowers fulfil their aspirations is shaped by the FCA, the financial ombudsman, the Prudential Regulation Authority (PRA) and other bodies.
Chart 1: Distribution of loans advanced by age and borrower type (for 12 months ended September 2015, excluding lifetime mortgages)
The report sets the scene by looking at what our data shows about current trends in borrowing at different stages of life; differences between borrowing in and into retirement; and how developments might be shaped by the demographic challenge of an ageing population and the concentration of housing wealth in the hands of older people, some of whom are asset-rich but cash poor. Chart 1 shows the types of loans taken out by borrowers in different age groups, and how this evolves over a lifetime. For those aged over 65 currently, borrowing is evenly split between those moving to a hew home and those remortgaging.
…and options are shaped by circumstances
The report goes on to set out a number of scenarios to help illustrate the broad range of circumstances and choices that can affect retirement borrowing decisions. These include, but are not limited to:
- being an older borrower with an interest-only mortgage but either with no plan for repaying it, or with a plan based on the sale of the property or drawing on pension savings intended to provide an income in old age;
- having a mortgage that extends beyond retirement age;
- taking on borrowing commitments and then having to adjust to a lower income, perhaps because of bereavement or age-related illness;
- the possibility of downsizing, and whether such a decision is made freely or because the borrower has few other options;
- the potential to make greater use of recently introduced pension freedoms;
- the possibility of inheriting property from older relatives – even for those approaching retirement age themselves; and
- the aspirations of older people to help their own children on to the property ladder.
We recognise that there are many narrow, technical issues that need to be addressed to make the mortgage market work better for older borrowers. On some of these issues, there is a clear case for the lending industry to take the lead. But the complexity of some of the scenarios faced by older people (outlined above) also illustrates the need for credit provision to meet a wider range of challenges. In many ways, therefore, our work is inextricably linked with others seeking to deliver the right outcomes for older borrowers.
So, how can we make progress?
The issues are often broad-ranging and complex. The final sections of our report therefore sets out a range of “next steps” and calls to action for a range of bodies that can shape the way forward in addressing the challenges of retirement borrowing.
For lenders and the CML, we propose:
- That the industry continues to work with intermediaries towards providing more seamless advice, and looking at the accountability and responsibilities of lenders and intermediaries in mortgage sales and servicing, particularly in relation to the needs of older borrowers.
- That emerging evidence about how people are using the recently introduced pension freedoms should be monitored, partly to understand what impact this is having on the mortgage market. It may also be necessary to re-consider how pension illustrations and equity release affordability calculations are presented to consumers, and whether there should be closer alignment of the way this information is presented.
- That the industry explores the potential for a product for those aged between 50 and 75 with the capacity to flex between capital repayment and interest-only roll-up. We also need to consider the possibility of further product innovation.
For the FCA, we propose:
- Looking at the development of a more holistic approach towards mortgage, lifetime and investment advice, aligned to the wider needs of older customers.
- Considering how different reasons for borrowing should be reflected in sales processes. For example, age is often seen as the key determinant for assessing future income and expenditure patterns, yet the health of the customer or future care needs may actually be more significant.
- Working with the lending industry and others to establish a standard definition of retirement. As we move further away from an accepted agreement that age defines retirement status, this may become increasingly important.
We ask the PRA to consider:
- The impact of requirements for lenders to hold capital against the provision of products that help older customers meet their needs.
- Its specific requirements for Solvency II, and the potential impact of these to affect the provision of products that meet the needs of older borrowers, or act as a disincentive for lenders to design new products.
We ask HM Treasury to consider:
- The case for tax relief on the provision of professional advice at retirement to encourage more people to seek it as they plan for the future.
- Reviewing what advisers working for the government service Pension Wise currently ask older borrowers about their housing debt. We would be happy to help provide draft scripts for this purpose.
- Taking a broader view of the scope the housing market, focusing on the needs of older borrowers, as well as younger ones. For example, independently commissioned research accompanying our report looks at state-backed guarantees in the US and South Korea, and we believe that it might be worth considering if similar schemes could work in the UK.
The issues and challenges associated with retirement borrowing are complex, and are often inter-linked with other decision for older people: about pension provision, their changing accommodation needs and the need for care, and how wealth acquired over a lifetime may be drawn upon to fund a range of lifestyle choices, in the right circumstances.
Their differing circumstances mean that options, choices and solutions will not be the same for all older people. We therefore recognise a need to work with individual lenders, as well as consumer groups, pension providers, financial advisers, housing providers, think tanks, other trade bodies, regulators and government as we try to make progress in this area.