SPECIAL FEATURE: Regulation and retirement
Today, for the first time in history, Britain’s over-65s now outnumber people under the age of 16.
As the fastest growing age group in the country, the baby-boomer generation is once again the focus of attention, this time as they hit or race towards retirement. With recent figures suggesting that the country will see a continuing ageing population over the coming years, the inevitable result is that increasing numbers of us will have a mortgage well into later life.
Figures from the Office of National Statistics show that between 2001 and 2011 the amount of economically active people between the ages of 65 and 74 almost doubled, rising by 413,000 people, and currently more than 1.4m people in the UK are aged 85 and over, with this number expected to double in the next 20 years.
The reality is that as people get onto the property ladder later in life – the average first-time buyer is now aged 37 – mortgage providers need to look at new products that grow with the customer.
So how do we accommodate and adapt for this growing group of pensioners, many of whom will still be paying off a loan well past their 60s and 70s?
Before the financial crash, lenders did issue loans to customers into their retirement, but most restricted this offer to people up to the age of 70, though there were some examples where offers were made to customers older than this.
In the immediate aftermath, however, the mortgage market was forced to look at its lending practices and began to take a more cautious approach to lending. This was no bad thing given the crisis being faced at the time and it was inevitable then that the subject of age and lending into retirement would come under scrutiny. Soon we began to see lenders lowering their upper age limits, perceiving older people to be ‘high risk’.
The financial ombudsman said in its latest annual review that it saw a rise in complaints relating to porting – or transferring – a mortgage to another property, with people believing they have been discriminated against because of their age. This appears to be linked to a misinterpretation of the rules brought about by the MMR. While in many cases the caution shown by lenders is understandable, such decisions may not be compliant with the principles laid out by the Financial Conduct Authority (FCA), and in severe cases could lead to enforcement action.
The MMR, which made the mortgage industry look again at its rules and processes, led to stricter and more stringent regulation being introduced in April last year. This certainly has not ruled out the possibility of lenders offering mortgages into retirement; in fact, it could be argued that it may even have had a beneficial effect – the key word in the MMR is, after all, ‘affordability’ and the need to meet this criteria applies to anyone looking for a loan, whether they are a young first-time buyer or a pensioner purchasing their next home. All lenders must assess if the customer will be able to pay back the sums they owe.
The MMR is clear that there is no place for lending criteria to include arbitrary cut-off points relating to the age of the consumer. And, with the average life expectancy for men now reaching 85 and 87 for women, it would be naïve of the industry to simply dismiss a whole section of society who, despite their age, show that they can afford their repayments.
So, is the combination of retirement and regulation proving to be a barrier to getting a mortgage?
If a customer is looking for a new mortgage to replace an existing product and where there is no additional borrowing or material change likely to affect affordability, FCA regulation currently says that no affordability check is needed. Customers who were already retired when they took out their mortgage will benefit from this approach as, under these conditions, there would be no need for them to show evidence of affordability.
However, as being retired is considered likely to represent a ‘material change’ in affordability, older customers switching products and hoping to have a mortgage into their retirement will not escape this necessity, whether or not they’re looking to borrow more.
What’s more, the closer the customer is to retirement, the more comprehensive the evidence of affordability in retirement needs to be to comply with this regulation.
When talking about older customers earlier this year, Linda Woodall, director of mortgages and consumer lending for the FCA, said that ‘concerns remain about their ability to afford to repay their mortgages because of additional unknown expenditure such as care costs or affordability issues if one borrower dies’.
The conflict facing the mortgage industry is how to make sure it offers older people the most appropriate products in a fair and balanced way, while bearing in mind that as we age, there are additional factors that add to potential risk. As well as the financial implications – asking ‘would repayments be affordable on a pension?’ – we have to think of the types of products we offer to customers and how we do this. We need to remember to be personal and understanding when taking into account emotive issues that change people’s circumstances, such as ill health – both mental and physical – and death.
Such sensitive topics always need sensitive handling, from the first time a customer speaks to an advisor through to the last. With the right training and approach, as an industry we can look to provide pensioners with a service that fits with their own individual circumstances.
Please release me
There is a call for customised products to suit individuals – the ‘one size fits all’ approach is no longer good enough in a mortgage market where borrowers’ requirements differ so much. For instance, equity release products serve a particular set of needs that standard mortgages can’t address.
As the largest third-party servicer of equity release products in the UK, the team at Capita Mortgage Services frequently comes across cases that highlight the potential vulnerability of older customers. For example, we have seen times when a borrower at the time of signing up to a product fully understood what it was they were agreeing to but, in later life with a failing memory, struggled to fully understand the nature of that agreement. Of course, these situations are difficult for everyone involved but, with training to specifically deal with challenging situations like this, advisers are able to be patient and understanding, tailoring their approach to the customer by offering additional care, attention and reassurance.
There are many instances where our employees have to be empathetic, knowledgeable and helpful all at once. They are used to doing this at difficult times, such as when speaking to family members or executors of wills after someone has passed away. This also comes into play when offering advice to people who want to downsize, redeem (pay off their loan early) or part-redeem their mortgage, and we make sure we keep in touch with customers, contacting them at least once a year.
We frequently conduct variations of contract on equity release products for older borrowers and can encounter some issues at this stage. For instance, when we receive a request to port a borrower’s loan to another property, some customers no longer remember that the product they have taken out actually is a mortgage.
Some customers think the porting process will be as simple as merely changing the address on the account but this isn’t the case. Often the borrower wants to downsize and reduce their debt but porting still does involve completing a new application and all that it entails.
We take seriously our duty to properly explain these requirements to customers, outlining exactly what is involved for consideration of the move while making sure the process is as easy as possible.
We know that it pays to learn more about older borrowers and their situations at an early stage – to understand what their personal circumstances are, determine their reasons for moving home and offer to provide advice where appropriate.
So as the baby boomers bounce into retirement hopefully they can look forward to flexible and innovative products that match individuals’ unique needs coupled with an approach from lenders where each and every case is assessed on its own merit – age is only a number after all.