Flexibility is key to lifetime success
Georgina Smith is managing director at Stonehaven
The latest figures released by the Equity Release Council show lending rose 32% year-on-year to its highest point since 2004 at £326 million. This sharp increase suggests pensions are no longer supporting vast numbers of retirees and many are now turning to a lifetime mortgage to provide capital in retirement.
As pension pots are required to stretch further than ever before and people are living longer, lifetime mortgages are gradually playing a bigger role in retirement planning.
Stonehaven believes much of this latest increase is because homeowners aged 55 or over are using a lifetime mortgage to make up the shortfall on their interest-only mortgages, as well as helping loved ones get a foot on the property ladder.
With the mainstream market introducing tightened lending criteria and limiting opportunities for retirees, lifetime mortgages can be a sensible solution for many older homeowners.
Alongside this, the Chancellor’s announcement in this year’s Budget that pensioners will be able to withdraw their entire savings in cash may also be affecting the market.
With these pension changes in mind, it’s important the lifetime mortgage market responds appropriately with flexible products which match the changing aspirations of those in, or approaching, retirement. In response to the Budget, financial advisors should now view a home and retirement savings as one single asset pool to help provide comfort and security in old age.
We know increasing numbers of pensioners are set to enter retirement over the coming years burdened by high mortgage debts and credit card bills.
Four in 10 of our customers now use a lifetime mortgage to clear an existing interest-only mortgage.
Worryingly, earlier this year the FCA reported there are now 2.6 million interest-only mortgages due for repayment by 2041. As many as 48% of these face a shortfall at repayment day, with an average figure of around £71,000. For many, a lifetime mortgage will be their only option other than losing their home or downsizing. In response, the lifetime mortgage market is expected to grow further over the coming years. These financial products have dramatically evolved over the last decade, with advisers able to tailor product features around their client’s ever changing needs.
Available to homeowners aged 55 and over, lifetime mortgages allow homeowners to release cash from their properties without losing ownership.
The cash is released as a tax-free lump sum which can be used for any purpose.
The mortgage is typically repaid when the client passes away or moves into long-term care.
The market has always welcomed innovation, with Stonehaven introducing interest payments back in 2006 with other providers following suit more recently.
This was a fresh approach to the standard lump sum product, where interest rolls-up and is added to the outstanding balance.
By being able to choose how much interest to pay, and for how long, the homeowner is in full control of their mortgage and can reduce or even eliminate the impact of interest-roll up.
This means that the remaining equity in the property is not eroded over time and can be passed to future generations as an inheritance.
This innovation has helped the market to grow, and in the last year similar flexible products have been launched by other providers so clients can make one off payments as and when they choose.
This dynamic nature of the lifetime mortgages market fits perfectly with Chancellor George Osborne’s strategic rethink on retirement planning and empowering savers.
Working hard to support advisers increase their awareness of the breadth and depth of lifetime mortgage solutions will be key to building awareness over the coming years.
As more pensioners look to lifetime mortgages to help ease the impact of the interest only time-bomb and others search for a flexible approach to long term financial security in the wake of the pension changes, we expect the lifetime mortgages sector to evolve further.
This will ensure that homeowners are always able to find a solution which meets their own individual needs, but most importantly provides a secure retirement which reduces financial worries in old age.