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January 2020 | Equity ReleaseSurveying

Kevin Webb: The evolving nature of later life lending

Kevin Webb is managing director of Legal & General Surveying Services

In 2019, the number of households in the UK grew by 249,000 from the previous year to 27.8 million, a rise that the Office for National Statistics called statistically significant.

There wasn’t one single factor driving this, but notable was the fact that the number of people living alone has increased by a fifth over the past 20 years, from 6.8 million in 1999 to 8.2 million in 2019. The majority of this uplift was driven by the growth in the numbers of men living alone, predominantly aged 45 to 64 years.

At the same time, analysis from the ONS also showed that while, overall, the proportion of the population who are divorced has remained broadly the same over time, the age profile of the divorced population has also shifted since 2008.

A smaller share of people under the age of 55 years were divorced in 2018 whilst the share of the divorced population has risen for those aged 55 years and over. This could be partly because of people increasingly getting married later in life.

Despite the rise in the proportion of the divorced population who were aged 70 years and over in 2018, the rise of the size of the married population who are 70 years and over has been greater.

This has implications not just for how we plan for the types of new homes built in this country – there is clearly a need for many more one and two-person homes than are currently being built. But it also highlights an emerging risk consideration for those in the mortgage and later life lending markets.

Much later life lending is done based on the assumption that there are two co-habitees. The slow initial take-up of retirement interest-only mortgages has broadly been put down to the fact that the affordability underwriting just does not stack when assessed on a sole survivor basis. At the moment, that is fuelling a significant rise in the number of lifetime mortgages provided.

According to figures collated by the Equity Release Council, over 33,000 new customers accessed their property wealth via equity release in the first three quarters of 2019, exceeding the total number of new plans agreed in any full year from 1991 to 2016.

So swift has the growth of the market, which is up from around £1bn five or six years ago to over £4bn today, been that it emerged in mid-December that the Financial Conduct Authority has been liaising with firms to give it a better understanding of what is driving such rapid growth in the number of homeowners drawing money from their homes.

The fact that the regulator is supervising the standards of advice, underwriting and regulation in the later life lending market closely must be welcomed. It should also prompt the industry to remember that we must be constantly reviewing our own processes and the assumptions that we make when underwriting deals like this. 

The demographic shifts outlined above have clear implications for affordability on later life lending where repayments are made rather than rolled up into the capital balance.

They also have an effect on the risk associated with the security that underlies the loan. At the moment, equity release providers typically instruct a valuation of the property when the lifetime mortgage application is submitted for approval and then again when the property is sold on the death or move into full-time care of the remaining householder.

While usually the interim period is around seven years, there is scope for it to be much longer, particularly, as is likely, homeowners with insufficient pension savings and income tap into the equity in their homes to support their later years much earlier in their much longer lives.

Without regular valuations (and the implicit remedial works that result from these inspections) there is an increasing risk of property dilapidation.

This not only presents the immediately obvious cost consideration for providers, who also foot the bill for no negative equity guarantees and inheritance guarantees. There is also the very real and ethical consideration for the borrower living in the property. 

There are providers in the market that have offered (and perhaps still do) development loans to upgrade properties at the start of the lifetime mortgage period in order to mitigate this security risk. This can have huge financial implications for borrowers, who will be charged compound interest on both the development loan and the lifetime loan. 

There are big ethical questions that need to be asked if we are to serve the increasing number of older homeowners who deserve to have a choice about how they access and spend the wealth they have accumulated over the course of their lives.

The issues with later life lending are not insoluble, but they do need to be addressed. It’s important to understand the breadth of opportunity, but also of the responsibility we have towards those we are serving.