Lenders wake up to late-life loans

This move is long overdue after the banks pulled back so heavily in the aftermath of the Mortgage Market Review (MMR). The FCA has stated on several occasions that it was never its intention for later-life lending to dry up in the way that it did, but lenders’ caution was understandable to an extent as they got to grips with what responsible and affordable lending looked like under the MMR. What no one expected was for lending to older borrowers to dry up quite as completely as it did.

Nationwide paved the way in May, extending its maximum age limit to age 85; others have followed suit, although not as generously, with Halifax lending to age 80, Santander, TSB and HSBC now lending to age 75 and a few other lenders, including RBS and NatWest lending to age 70. Family Building Society, Dudley and Cambridge Building Societies have no maximum age limit.

What they all have in common is that they require proof of retirement income, which of course makes perfect sense. What is clear is that now the bandwagon has got rolling, lenders that have not already extended their upper age limit may need to jump on or risk being left behind.

So why are lenders doing this, and why now in particular?

With the extension in the state retirement age, it makes perfect sense for lenders to lend at least until that age.

However, the case for lending into later life is not as clear-cut as it used to be. The abolition in 2011 of compulsory retirement has paved the way for people to work to a much older age. And many people are, out of choice because they are still fit and well, or out of necessity because their pension is too small to live on comfortably.

The need for mortgages into later life is also growing because the age at which people get onto the housing ladder is rising. There is growing evidence that many people are not buying their first property until well into their thirties due to the burden of student loans, or the inability to raise a large enough deposit.

Another increasingly common issue is that lenders are now taking student loan payments into account when weighing up the affordability of a mortgage. With yet another increase in student fees on the cards, the next crop of students will probably leave university with debts of around £50,000 – the same amount as the average mortgage just 30 years ago.

This raises a number of questions. How does a young person save for a deposit while paying back a student loan each month? And, once they have got a deposit, how do they qualify for a mortgage if their student loan repayments take them over a bank’s affordability threshold? Increasingly, for a mortgage to be affordable the term is extended to 30 years as standard. These factors alone significantly raise the average age of the first-time buyer, and have a knock-on effect of extending the period of time for which they will need a mortgage on their first home.

Bank of mum and dad

Despite the Help to Buy scheme and the growth in 95 per cent LTV mortgages in the last couple of years, for many, the only way to get on the housing ladder is with the help of mum and dad. Often parents and even grandparents are remortgaging their own properties in order to help their offspring buy that elusive first house. Many older family members will prefer to keep their monthly mortgage payments the same and extend their term, especially if they are close to retirement age.

The very act of helping their children will therefore take their mortgage past their retirement age. If their income permits them to keep making payments, however, and this looks set to continue for many years, it makes sense that they should be able to use their money to help the next generation of homeowners.

Second steppers

Of course the impact of people buying their first home when they are older is that they then move up the property ladder later. Here, the housing shortage also plays a role: with fewer second or third houses to move into, people are staying put for longer, sometimes not finding what might be expected to be their final home until five or 10 years later than would historically have been the case.

Typically, as someone moves up the ladder, the property, and therefore also the mortgage, gets larger. The housing shortage magnifies this effect, driving up house prices, which means the size of the mortgage escalates with it. This all leaves many people looking to take out a large, final, 25-year mortgage at age 45 or even 50, taking their mortgage well beyond what is traditionally considered retirement age.

Pension freedoms

All of this creates a complex picture against which a lender has to decide whether someone is a suitable risk. From a lender’s point of view, it is incredibly difficult to predict a borrower’s income up to say, age 80, if they are borrowing while still in work. The lack of final salary pensions compounds the difficulty, as it is challenging to predict with any accuracy what size someone’s pension pot will be when they still have 15 years’ worth of payments to make into it.

On the upside, where lenders are concerned, are pension freedoms. LV reported in July that 45 per cent of its customers who have taken their full cash pots used it to pay off their mortgages, while a survey last month by insurance company Partnership found that one in 10 people intended to use pension freedoms to pay off mortgage debt. While this may not do much for the nation’s ability to look after itself in retirement, it does leave mortgage providers a little more likely to see their loans repaid. Flexibility among lenders to enable people to overpay their mortgages as they go along helps ensure that some borrowers at least have a smaller amount outstanding than may have been expected.

It is clear that the requirement for a mortgage into later life has been a conundrum for lenders for the past four or five years. They have been slow to react but it is good to see that they are finally taking action. Every lender will need to do the same in order to remain competitive so look out for more lenders joining this space.

John Phillips is group operations director of Spicerhaart and Just Mortgages