In the following exclusive for our ‘In Focus’ series, Will Hale, CEO of Air, discusses how later life lending can boost resilience as mainstream mortgage rates rise. With older borrowers increasingly exposed to affordability pressures and refinancing challenges, Will explores why this once-niche market is stepping into the spotlight, and what brokers and advisers do to keep pace with growing demand.
The later life lending market is growing rapidly, as the latest UK Finance figures show, with the current mortgage market turmoil adding to the momentum across the sector. But the sector can only deliver on its potential if advisers have the right support.
Growth in the number of loans and the value of lending is well-established, with a 15.1% rise in the number of new loans advanced to older borrowers in the fourth quarter of last year.
The total value of loans increased by 20.5% on the previous quarter to £6.8 billion, with around 5,700 new lifetime mortgages advanced with a total value of £510 million. Around 388 retirement interest-only mortgages were advanced with a total value of £36 million during the period.
It is a growing market, undoubtedly, but also at the same time a relatively small slice of the mortgage market as a whole. Residential loans to over 55s accounted for just 8% of the total residential mortgage market in the fourth quarter of last year, while buy-to-let later life loans made up just over a fifth of all buy-to-let loans.
The potential to expand even further is being driven by the challenges older borrowers face as mortgage rates rise. Advisers focused on the market, however, have to be able to engage proactively with potential customers and equip themselves with the tools to deliver the holistic advice later-life lending customers need.
The case for growth
In the current climate of rising mortgage rates, borrowers need support with boosting their financial resilience and that applies even more so in the later life lending market.
Older borrowers looking to remortgage in the current climate may be heading for a shock as average two, three and five-year fixed rates rise. Potentially, they face a double hit of higher rates and tougher affordability assessments.
Five-year fixed rates in 2021 were at historic lows, while many older borrowers with higher LTVs who may have qualified for sub-4% deals two years ago will find it hard to source those sorts of rates again, resulting in higher monthly repayments and a significant strain on net disposable income. Borrowers who fail affordability assessments will be even harder hit and could end up reverting to standard variable rates of between 6.5% and 7.5%.
Holistic later life lending advice supports a wider range of wants and needs over and above just the pressing requirement to remortgage against a backdrop of rising rates.
Later life lending can deliver good customer outcomes across a range of both needs and wants, such as providing financial help for families, boosting retirement income, funding capital purchases and even financing care in the home.
Advisers already active in the later life lending market need support on how to engage effectively with customers in what is still a low awareness and much misunderstood category. Furthermore, they need access to specialist sourcing tools and other resources so they are as well informed as possible on the full range of options available when it comes to making a recommendation.
The range of options
Modern lifetime mortgage products offer a wide range of flexible benefits, including the ability to make voluntary repayments as well as rate discounts for customers committing to paying some or all of the interest.
These repayment options enable customers to mitigate the impact of compound interest and to manage the cost of borrowing while maintaining their standard of living and/or helping family.
There are options available which offer no early repayment charges, increasing flexibility in the event that circumstances change, perhaps on the back of an inheritance, or opening up remortgage opportunities if or when rates fall.
Particularly in the current market conditions, advisers need to dig deeper into the options available and assess benefits and protections such as fixed rates for life, certainty of tenure and no negative equity guarantees alongside cost of borrowing considerations. Rate is just one part of the equation and understanding the specific risk preferences and personal circumstances of customers will determine which product is likely to deliver the best outcome.
This holistic assessment is fundamental to meeting Consumer Duty expectations around suitability, and it is vital that the options discussed and customer understanding is fully recorded/documented to evidence good outcomes.
Supporting holistic assessments
Extensive product research is vital in the later life lending market at all times, but particularly so in the current climate.
Comparing the interest-served options available from later life lenders is especially important, as is highlighting the differences in early redemption charges. This is particularly important in the current higher rate market, where remortgaging may be possible later on.
Air is supporting advisers with making confident and informed decisions on later life lending through modelling on outcomes including inheritance implications. Our Air Sourcing platform enables advisers to source a comprehensive range of later life lending products in real time including lifetime mortgages and retirement interest-only solutions.
The goal is to equip advisers with the insight and tools they need to deliver confident, client-centred advice in a fast-moving environment. And the current mortgage market is definitely that.
