By Will Hale, CEO at Key Later Life Finance
It’s a £55 billion annual market helping thousands of customers to improve their quality of life and achieve financial aims which might have seemed beyond their reach in retirement. It enables parents and grandparents to support families with buying homes while ensuring their own homes are retirement ready.
It plays a role in wealth planning and delivers a way for thousands of people to unlock the value of the biggest asset most people own. It gives older homeowners flexibility with their finances at a time when they need it.
And yet while the later life lending market is firmly established as a fast-growing part of the financial services market there is still a surprising lack of awareness from potential customers and more surprisingly a lack of awareness among some advisers.
Later life customers are growing in number:
Government estimates put the percentage of over-65s in the UK population at around 22% by 2030 and rising to 24% by 2043. It’s a potentially massive market and yet AKG Financial Analytics recent report “Future of Later Life Lending – Targeting Responsible Market Growth” found the potential customers of the future are not aware of their options.
- over-55s were very aware of the existing range of later life lending options including equity release, retirement-interest only mortgages and standard mortgages offering longer terms.
The wide range of later life lending choices:
While customers can now look at RIOs and later life mortgages, equity release is clearly the front runner in this market – especially given the fact that modern lifetime mortgages offer more flexibility than ever before. This includes the opportunity to proactively manage borrowing through both servicing interest and/or making ad hoc capital repayments. Appropriate use of drawdown facilities to ensure that customers only release what they need and recommending customers make repayments in line with what they can afford is vitally important in the current higher interest rate environment as the impact of compound interest can restrict options for customers down the line – including the ability to remortgage to a lower rate.
Following the introduction of the Equity Release Council’s 5th product standard in March this year all new LTM products allow ad hoc capital repayments. To illustrate the benefit of a customer using this feature, someone borrowing £100,000 on a rate of 6% and making a payment of £100 per month would reduce they amount of interest owed by over £16,300 over ten years.
Fixed early redemption charges which typically last 10 years but can be as short as four years mean lifetime mortgages are not really technically lifetime mortgages any more. A fact that is clearly illustrated by the growth in the ‘remortgage market’ with our most recent Q3 Market Monitor estimating that 2,268 cases were completed in the three months compared with 1,004 in the same period last year. Customers during the period switched from rates of 5.1% to 4.65 so while rising rates may slow that down the flexibility of products should support growing demand.
Modern lifetime mortgages also come with a raft of inbuilt protections such as the no negative equity guarantee as well as security of tenure. Finally, while ongoing repayment is encouraged and discussed in-depth as part of the advice process, equity release borrowers do not need to pass affordability criteria so those on modest budgets, who often find themselves excluded from RIOs or other later life lending products, can find suitable options to meet their individual needs and wants..
The Value of Advice in this Market:
While there is no doubt that equity release and other later life lending products have evolved over recent years, many customers are unsure of their options or have lingering concerns due to historic negative press coverage of the sector which is why high quality advice is so very crucial in this market.
Whether it is provided by the intermediary who has the initial contact with the customer or via a referral relationship with an expert firm – a mechanism which is due to become even more common under the new Consumer Duty regime – the ability to offer people the option to discuss how they can use their housing wealth, which is often their largest asset, is vital in the later life financial planning process.
Later life lending isn’t right for everyone but all IFAs, wealth managers and mortgage brokers need to start having these conversation to ensure that they can clearly demonstrate the value of their service for all their customers.