MAY 2015 – The real lending into retirement conundrum

As working patterns change and we have a more active elderly population with more people will wanting to phase in their retirement, the industry will come under increasing pressure to provide advice on more flexible mortgage products.  Indeed we will need to create these products.

Perceived industry wisdom has been driven the by FSA in its MMR, which has traditionally provided that mortgages should be repaid before retirement arrived.  Lender rules and models normally see such lending as outside core policy.  This therefore attracts either higher capital requirements or potentially reluctance from the regulator to permit expansion into this area as the lender lacks experience.  Some smaller building societies will operate in this space, but they tend to be the exception.  These new demands are not just a response to concerns over interest only – it is a fundamental need for new products to fund retirement.  Home are our biggest asset.

What is undoubted from the intermediary perspective is that there is increasing need and demand from consumers to borrow in retirement.  This is not an affordability issue, it is a matching of aspiration against income and using that income to its best effect.  The historical reputation of equity release deters many from opting for that route once they are into the decumulation phase of life – using acquired asset to fund lifestyle.  However it is important that advisers discuss this option and inform the debate.  Also we need to reopen the debate with the regulator on their myopia on repayment, within the wider financial planning agenda.

For some consumers a lifetime mortgage might be more acceptable, indeed a very viable alternative.  For some this is a credible IHT planning exercise.  Hybrid mortgages that allow interest servicing with conversion options are needed to provide broad suites of product solutions.  It is only with more market participants and a wider product set that we will see advisers embrace this market and they will see it as worth investing their marketing effort and expanding their knowledge set.

I fear the solutions are all in the hands of providers.  It may well be that genuinely this is a case of a market where “if they build it we will come”.