CML: Lending into retirement
Over a third of new mortgages being taken out today will extend beyond the borrower’s 65th birthday, delegates at our pension tension conference were told last week.
But less than 1% of all new lending (including equity release lifetime mortgages) was to this group, illustrating one of the many conundrums that exist in serving the needs of older homeowners in the future.
The conference highlighted a number of recent developments, including the introduction of pension reforms, which could have a significant impact on retirement borrowing. And it focused on the impact of some much longer term trends – including demographic shifts that are changing the landscape over decades.
The conference also helped crystallise an important distinction between borrowing into retirement, and borrowing by customers in retirement.
The former is a much larger phenomenon. Lengthening mortgage terms and the older age at which some buyers are entering the property market means that almost 35% of new loans are not expected to be fully repaid until the borrower has passed the nominal retirement age of 65. However, most of these are paid off shortly afterwards.
Around 80% of mortgages extending past the borrower’s 65th birthday are due to be repaid before the customer turns 70.
In contrast, borrowing in retirement occurs on a much smaller scale, and has been in decline since 2007 (apart from a small uptick last year attributable to strong growth in lifetime lending).
The value of mortgages (excluding lifetime mortgages) taken out by borrowers aged over 65 declined to around £1bn last year – accounting for only 0.5% of total annual advances of more than £203bn.
Trends affecting retirement borrowing
One factor likely to have a significant impact on retirement borrowing is the rapidly ageing population of the UK. There are currently more than 11 million people aged 65 or over (accounting for around 17% of the population). But the total is expected to grow to around 17 million (or almost 25% of the population) by 2034.
Moreover, within this group, the largest percentage growth will be in those aged 85 or older. The number in this group is set to more than double to around 3.4 million from around 1.5 million today.
Another important factor is the amount of housing equity owned by pensioner households. A recent index published by equity release specialist Key Retirement put the amount of property wealth owned outright by retired home-owners at almost £874bn.
Meanwhile, earlier this year, the English Housing Survey showed that for the first time the number of homes owned outright exceeded the number being bought with a mortgage. And it is older households that are more like to own their home outright.
But, despite the growing wealth of the UK’s ageing population, borrowing by those aged over 65 has been falling – by number of loans and value – since 2007.
Total borrowing by those aged 65 (including lifetime mortgages) was around £1.7bn last year, accounting for less than 1% of all advances.
The uptick in borrowing by this group last year was driven by strong growth in lifetime mortgages, and this has been predicted to continue by a number of commentators. Lifetime mortgages accounted for around half of all borrowing by the over-65s reported in our data.
As one would expect, people will generally have different reasons for taking out loans at different stages of their lives. The pattern for choices later in life is often set by the age at which people are able to get on to – and then move up – the property ladder. Among borrowers aged over 65, there is almost an even split between those taking out a loan to move home and those remortgaging.
The English Housing Survey shows that trends in borrowing over a long period have contributed to a change in the age profile of households that have mortgages.
There has been a decline in the proportion of mortgages held by younger households (those aged up to 44), and a corresponding increase in the proportion held by older people.
There are a number of reasons for this, including an overall decline in first-time buyer numbers, the rising age at which some of them are entering the property market, and lengthening mortgage terms.
Our recent conference also provided an opportunity to update our analysis of loans extending into retirement, which we last published in April 2014.
As before, we have assumed a nominal retirement age of 65 – even though the age at which people actually retire is generally rising but becoming less certain.
The proportion of loans expected to extend beyond the age of 65 is continuing to increase, and is approaching 35%.
In recent times, a growing proportion of mortgages extending beyond the age of 65 have been taken out by home movers.
They now account for around half the total. But the number of first-time buyers taking out mortgages that will mature beyond the age of 65 has also been edging upwards – and accounted for 21% of the total in the fourth quarter of last year.