CML releases new research on consumer demand for retirement borrowing
Published: 10 November 2015
The Council of Mortgage Lenders is today pleased to support the publication of an independent research report on consumer demand for retirement borrowing, commissioned to help inform the CML's strategic project on improving the lending market for older borrowers.
With a 51% rise in the over-65 population projected between 2010 and 2030 - and a 101% rise in the over-85 population - it is vital to promote sensible and suitable mortgage finance to support both the aspirations and potentially the social care costs of older home-owners.
The research was undertaken by Dr Louise Overton of the School of Social Policy at the University of Birmingham, and Lorna Fox O'Mahony of Essex Law School at the University of Essex. The researchers identify the key drivers of demand for retirement borrowing, review the financial product options currently available and their limitations, and explore the potential role of government in sharing risk and responsibility for lending in retirement, with examples drawn from overseas.
The research also identifies some important knowledge gaps in terms of understanding exactly what real consumers want and need in terms of products, as well as about how they make decisions about their retirement income and assets, and the advice they use (or would regard as valuable and trustworthy). Both the industry and the government need to gain more insight on these aspects to develop a lending market for older borrowers that offers attractive products that genuinely meet consumer needs as well as mitigating lending risk.
Key findings fall into three main areas:
Drivers of demand
- A key consequence of increased life expectancy is that people will have to manage their retirement income and assets over a longer period than past generations - but people frequently underestimate how long they will live and what their needs will be.
- Pension reform has already resulted in a dramatic decline in annuity sales, increasing the uncertainty about whether fewer people will have adequate long-term pension income to ensure financial resilience and an ability to cover the costs of their social care needs as they age.
- Carrying debt into retirement (unsecured, as well as mortgage) is a relatively new phenomenon, which reflects a deliberate strategy on the part of some households but financial strain on the part of others.
- The relative balance of paying for social care is shifting away from the State and onto the individual. Income is rarely sufficient to cover these costs and releasing housing equity is likely to become a more important component of funding for these needs.
- Property supply and cost issues act as barriers to trading down, and in the absence of resolution to these challenges the likelihood is that borrowing against equity on existing property increases - particularly as the perceived importance of leaving bequests seems to be diminishing among "younger older" cohorts.
Borrowing options - opportunities and limitations
- The future affordability assessment requirements that lenders have to undertake in line with recent reforms to FCA regulation have tended to be implemented cautiously, meaning that it has become harder for people to access conventional mortgage borrowing that extends into retirement. Lenders need reassurance that sensible lending into retirement will not be subject to retrospective negative assessment by regulators.
- Unsecured borrowing is also constrained, with personal loans and credit cards typically being subject to age or income related limits that may limit older people's access to them.
- There is a risk that unregulated high-cost credit may be a source that some older borrowers turn to if their other borrowing options are limited, although there is no specific evidence of this.
- While there has been a significant increase in the equity release/lifetime mortgage market, in overall volume terms it remains extremely small, and it still faces barriers in terms of negative perception by some consumers, as well as provider product design trade-offs between very comprehensive consumer protection, and greater flexibility and innovation.
Sharing risk and responsibility
- There is a question about what role the State could or should play in enabling the industry and consumers to meet retirement borrowing needs more effectively.
- Various countries involve State interventions to share risk.
- The US has a Federal Housing Administration home equity conversion mortgage programme, and South Korea's similar programme achieves the same effect of offering increased protection, and enabling lenders to offer products at lower cost than would otherwise be possible.
- Japan has introduced a scheme to help people protect their assets but also provide income and an ability to move to more suitable housing. Singapore has a scheme that enables people to sell off excess lease lengths over 30 years in return for income.
- Poland makes released equity exempt from income tax.
- No particular model is necessarily appropriate for the UK, but the examples highlight that many countries do see risk sharing as an appropriate role for the State in facilitating borrowing against housing by older people.
The researchers conclude that "the current environment does not adequately meet the needs of our ageing population", and that both the approach to conduct risk and the design of products need to evolve.
They urge consideration of reversion products, not just lifetime mortgages, as part of this evolution, but say:
"The development of an effective and appropriate market for retirement borrowing must also be sensitive to contextual factors that are likely to affect access to financial services in later life such as different levels of financial capability and vulnerability, digital exclusion among older people, the effectiveness of advice and guidance as the main source of consumer protection for different types of customer, and debt aversion preventing take up of potentially beneficial solutions to income needs".
Over the next few weeks, the CML will be publishing a set of proposals designed to help the industry, regulators and government to take some tangible steps forward in addressing some of the issues. These are based on our own research, data and member insight, as well as valuable input from experts on the needs of older people.
Notes to editors
1. The Council of Mortgage Lenders' members are banks, building societies and other lenders who together undertake around 95% of all residential mortgage lending in the UK. There are 11.1 million mortgages in the UK, with loans worth over £1.3 trillion.