Brendan Burgess
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The UK Council of Mortgage Lenders has funded an independent report:
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Drivers of demand
They urge consideration of reversion products, not just lifetime mortgages, as part of this evolution, but say:
"The development of an effective and appropriate market for retirement borrowing must also be sensitive to contextual factors that are likely to affect access to financial services in later life such as different levels of financial capability and vulnerability, digital exclusion among older people, the effectiveness of advice and guidance as the main source of consumer protection for different types of customer, and debt aversion preventing take up of potentially beneficial solutions to income needs".
Over the next few weeks, the CML will be publishing a set of proposals designed to help the industry, regulators and government to take some tangible steps forward in addressing some of the issues. These are based on our own research, data and member insight, as well as valuable input from experts on the needs of older people.
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Drivers of demand
- A key consequence of increased life expectancy is that people will have to manage their retirement income and assets over a longer period than past generations - but people frequently underestimate how long they will live and what their needs will be.
- Pension reform has already resulted in a dramatic decline in annuity sales, increasing the uncertainty about whether fewer people will have adequate long-term pension income to ensure financial resilience and an ability to cover the costs of their social care needs as they age.
- Carrying debt into retirement (unsecured, as well as mortgage) is a relatively new phenomenon, which reflects a deliberate strategy on the part of some households but financial strain on the part of others.
- The relative balance of paying for social care is shifting away from the State and onto the individual. Income is rarely sufficient to cover these costs and releasing housing equity is likely to become a more important component of funding for these needs.
- Property supply and cost issues act as barriers to trading down, and in the absence of resolution to these challenges the likelihood is that borrowing against equity on existing property increases - particularly as the perceived importance of leaving bequests seems to be diminishing among "younger older" cohorts.
- The future affordability assessment requirements that lenders have to undertake in line with recent reforms to FCA regulation have tended to be implemented cautiously, meaning that it has become harder for people to access conventional mortgage borrowing that extends into retirement. Lenders need reassurance that sensible lending into retirement will not be subject to retrospective negative assessment by regulators.
- Unsecured borrowing is also constrained, with personal loans and credit cards typically being subject to age or income related limits that may limit older people's access to them.
- There is a risk that unregulated high-cost credit may be a source that some older borrowers turn to if their other borrowing options are limited, although there is no specific evidence of this.
- While there has been a significant increase in the equity release/lifetime mortgage market, in overall volume terms it remains extremely small, and it still faces barriers in terms of negative perception by some consumers, as well as provider product design trade-offs between very comprehensive consumer protection, and greater flexibility and innovation.
- There is a question about what role the State could or should play in enabling the industry and consumers to meet retirement borrowing needs more effectively.
- Various countries involve State interventions to share risk.
- The US has a Federal Housing Administration home equity conversion mortgage programme, and South Korea's similar programme achieves the same effect of offering increased protection, and enabling lenders to offer products at lower cost than would otherwise be possible.
- Japan has introduced a scheme to help people protect their assets but also provide income and an ability to move to more suitable housing. Singapore has a scheme that enables people to sell off excess lease lengths over 30 years in return for income.
- Poland makes released equity exempt from income tax.
- No particular model is necessarily appropriate for the UK, but the examples highlight that many countries do see risk sharing as an appropriate role for the State in facilitating borrowing against housing by older people.
They urge consideration of reversion products, not just lifetime mortgages, as part of this evolution, but say:
"The development of an effective and appropriate market for retirement borrowing must also be sensitive to contextual factors that are likely to affect access to financial services in later life such as different levels of financial capability and vulnerability, digital exclusion among older people, the effectiveness of advice and guidance as the main source of consumer protection for different types of customer, and debt aversion preventing take up of potentially beneficial solutions to income needs".
Over the next few weeks, the CML will be publishing a set of proposals designed to help the industry, regulators and government to take some tangible steps forward in addressing some of the issues. These are based on our own research, data and member insight, as well as valuable input from experts on the needs of older people.