What’s the situation?
The amount of mortgage debt held by the over 65s is set to almost double from £20.1 billion to £39.9 billion by 2030.
The financial industry, and mortgage lenders in particular, need to take action in response to these figures. The right moves could help stimulate the housing market to the benefit of wider population. Older people who, in recent years, have been trapped in their family home because they can’t access a mortgage, will be able to move. This will enable others to move along the ladder with them, as they free up highly desirable family and first-time buyer homes.
Why does the current landscape look like this?
Patterns of home ownership are changing due to economic, demographic and housing market changes:
- House price inflation and low real wage growth mean people can’t afford to get on the property ladder until later in life
- Tighter credit conditions mean borrowing is more difficult for some
- Low supply of new homes for first-time buyers.
This all adds up to a general trend of people being delayed from stepping onto the property ladder. Since the financial crisis, home ownership amongst 20-29 year olds has fallen from 53% to 38%. This trend follows for the 30-39 age bracket. The impact is that over 6% (1.42 million) of people aged 34 – 64 will not have paid off their mortgage before retirement under the current term of their loan. This situation is only being compounded by lengthening mortgage terms.
But it’s not just economic factors at play. There are cultural factors too. Increasingly, people in their 50s and 60s aren’t ready to give in to the pipe and slippers. They are still happy to make life-changing decisions, some of which require access to funds.
All of these factors are causing a shift in customer base of the mortgage market.
How is the market responding?
The good news is that mortgage lenders are already taking action.
Historically, older borrowers have often been stuck on uncompetitive mortgages, unable to move to a better deal because of the age limit on lending, rather than their ability to pay.
A slew of mortgage lenders have raised the age limit for borrowers to 80 or even 85 so the chances of getting a mortgage later in life have improved. Higher age limits massively improve the affordability of loans for older borrowers. Borrowers have access to longer terms than they may have done in the past, and a wider selection of mortgages to choose from, meaning interest rates tend to be much more favourable.
What about equity release?
With mortgages taking longer to be paid off and the subsequent additional demands on people’s finances as they progress through retirement, more people are relying on the equity in their home to fund their later years.
Equity release lets you access the equity (cash) tied up in your home if you are over 55. There are traditionally two options:
- A lifetime mortgage: you take out a mortgage secured on your property. You can choose to ring-fence some of the value of your property as an inheritance for your family. You can choose to make repayments or let the interest roll up and be added to the loan. The loan amount and any accrued interest is paid back when you die or move into long term care.
- Home reversion: you sell part or all of your home to a home reversion provider in return for a lump sum or regular payments. You can continue to live there, rent free, until you die. But you have to maintain and insure it. You can ring-fence a percentage of your property for later use, or inheritance. At the end of the plan, your property is sold and the proceeds are shared according to the remaining proportions of ownership.
Both products should come with a “no negative equity guarantee”. This means that when your property is sold and all fees have been paid, if the remaining amount isn’t enough to repay the loan to your provider, your estate will not be liable to pay any more.
The equity release sector recorded its highest ever lending total in the Q3 2016, according to the Equity Release Council.
Good news again, in that the equity release market is responding to the new mortgage landscape too. New flexible products have been developed that better meet the needs of older homeowners. For example, there are interest-only mortgages that can be switched to equity release at any time, providing more flexibility. The transformation of products has boosted the popularity of equity release.
There’s an important education piece that needs to be done around equity release to prevent older people making costly mistakes. For example, there is an increasing trend of money being drawn down under new pension freedoms to pay off borrowing. In this instance, we mean short term borrowing, not even to pay off existing mortgage debts.
These people may not be aware that average rates now available from equity release lenders are considerably lower than rates on loans and credit cards. Equity release may be a better option for them.
How can independent financial advice help in all this?
So, how can we help manage this situation for the benefit of everyone old, and young? There are a few things that needs to be done:
- Increase in housing supply – not much we can do to directly help there
- Increase in an intergenerational approach to home ownership as parents and grandparents borrow to release some of their housing wealth to support the younger generations – we can help here
- Make sure the right mortgage products and advice are available for all ages to maximise financial well-being into retirement – this is our forte!
We feel it’s our duty to make sure retirees know the best ways to access the funds available to them safely and easily. As with everything in our industry, what’s right for one person isn’t right for another.
Take equity release, for example. It can be a great option, but there are a lot of potential down sides too…
- Debt can increase quite quickly, so it’s worth considering whether you need a plan that will let you pay off interest, and potentially capital, rather than rolling it all up
- Equity release may be more expensive compared to an ordinary mortgage, so you need to check that
- You may not get anywhere near the open market value of your home on a home reversion plan
- If you release equity from your home, you might not be able to rely on your property for money you might need in later retirement, for care home fees, for example
- There will be less for you to pass on to your family as an inheritance.
For all of these reasons, and more, it’s vital to get advice before considering equity release. They can be tricky, and expensive, to unravel if you change your mind.
But it would also be prudent to speak to a financial adviser before taking out a mortgage in later life. Imagine, for example, that the value of your property after your death isn’t enough to pay off the outstanding balance on your new mortgage (if there’s a housing crash). In that instance, your legacy to your loved ones could be debt!
So the great news is, there are now more options for older people who find themselves with a mortgage to pay. But with choice comes the potential to make a costly mistake. Give us a call before you make any decisions and we can help make sure you, and your loved ones, are looked after throughout your retirement and beyond.