Last month I attended the ‘Great Retirement Money Debate’ which took place in London and was a broad look at the huge number of issues facing the later life market. If you couldn’t attend then I would recommend viewing the video of the event on YouTube because there was certainly a lot for advisers to get their teeth into.
Perhaps unsurprisingly, equity release figured prominently in the debate and there were some differing views in terms of how the sector might move forward post-pension freedoms, what the impact would be on take-up, what government could be doing to support the sector, and perhaps most interesting how the products fit into the mainstream mortgage world particularly in a post-MMR environment.
Of course, many of the issues highlighted and the potential solutions proposed are intricately linked together, however, it was interesting to hear senior industry players talk about a future where there should be far more collaboration between mainstream lenders and equity release providers. The reason for this of course is the somewhat delicate nature of lending into retirement at present and, as you will all have heard no doubt, the concerns voiced about not just those in later life accessing finance into retirement but borrowers in their 40s and 50s as well.
The CML are already looking into this area but certainly since MMR we have a situation where the tighter affordability measures that were introduced have had a serious knock-on effect for significant numbers of older (and not-so older) borrowers. Perhaps the best example of this is how borrowers with interest-only mortgages have been unable to refinance and have had to look for other options, notably equity release, in order to pay off the capital part of the mortgage.
Recent research from Age Partnership suggested the number of borrowers using equity release to do this had trebled since last April. Given the nature of the interest-only mortgage marketplace and the large number of loans yet to reach the end of their terms, one can only surmise that this figure will continue to grow, particularly if there is no relaxation of affordability by the mainstream lenders.
Not only do we have this situation but we must also consider those borrowers in their 40s or 50s who, as Dean Mirfin of Key Retirement rightly pointed out at the debate, are effectively having to cap the term over which they can now borrow. Proving affordability in retirement for someone who is mid-40s may seem rather ludicrous but there are a growing number of examples whereby borrowers looking for a 25-year term were rejected because their retirement income was unknown. This despite the fact that a many more people are likely to be working beyond the old State retirement age anyway.
If these 40 or 50 year olds can’t access traditional mortgage finance then what are their options because accessing equity release can only be done from age 55. This has the potential to be a real problem not just for these individuals but as a result of the knock-on effect this can cause throughout the mortgage and property markets. Finance rejected for one potential home mover could mean that property never comes to market and we lose housing supply and a potential chain.
So, what could be the solution? Perhaps a closer working relationship between mainstream lenders and equity release providers on further hybrid solutions, perhaps more mainstream operators moving into equity release as Santander has suggested it will do, but perhaps first of all there needs to be greater clarity around the MMR requirements, what lenders are doing, and what the FCA expects them to do. This is because the FCA tend to say lenders are over-egging the affordability pudding for lending into retirement, while the lenders say they are merely working to the rules and this is the result.
One has to believe that a compromise could be reached some way down the line because while the equity release sector may well benefit in the short-term, the whole market needs to function effectively particularly for those who, pre-MMR, would have had no need to turn to equity release and would have quite comfortably secured mainstream finance. However, If we continue with the current stalemate, we are looking at a far greater number of ‘mortgage prisoners’ than the architects of the MMR could ever have imagined.
Chris Prior is manager, sales and distribution at Bridgewater Equity Release
