A report from the Intermediary Mortgage Lenders Association, ‘Bridging the gap: Developments in later-life lending to an ageing population’, shows just how dramatic the rise in the average homeowner age has been over the past 20 years.
As Table 1 shows, homeowners aged 65 and above accounted for more than one-third of total owners as of 2016, a rise of almost 10 percentage points over the previous two decades. As a result, homeowner equity is largely concentrated in the hands of older homeowners. In 2016, homeowner equity was estimated to be around £2.6trn, of which £1.8trn (69 per cent) belonged to households with a homeowner aged 55 or above. Importantly, however, mortgage debt is also expected to rise by 95 per cent among older homeowners by 2030.
Table 1: Homeowners by age group
Age group | 1996 | 2006 | 2016 | % rise in 20 years |
65 and over | 4m | 4.7m | 6m | 51.9 |
75 and over | 1.7m | 2.2m | 2.8m | 68.6 |
All homeowners | 16m | 17.7m | 17.4m | 9 |
65 and over (% of total) | 24.8% | 26.4% | 34.5% | – |
75 and over (% of total) | 10.5% | 12.6% | 16.2% | – |
Source: House of Commons Library. Copyright: Money Management
Borrowing later and longer
Gone are the days when borrowers typically took out mortgages in their 20s, moved up the ladder in later years, and typically paid off their mortgage by the time they reached retirement. The trend of moving up the ladder much later in life – if at all – is likely to continue, because many are borrowing for longer terms in order to keep their monthly payments lower.
The IMLA report says that since the Equality Act of 2010 abolished the default retirement ages that most employers had in place, 65-year-olds have been the fastest-growing part of the workforce, up from 830,000 in 2010 to 1.2m in February 2018. With people expected to work longer, lenders are having to take account of borrowers’ projected retirement ages and consider what they offer older borrowers.
The FCA estimates there are more than 40,000 interest-only mortgages due to mature in households with borrowers aged 65 and above every year from 2017 to 2032. Many will need to extend the terms of their loans to keep their homes.
Faced with burgeoning numbers of older borrowers with interest-only mortgages and no realistic means to repay their capital, earlier this year the FCA introduced a “new” category of borrowing: the retirement interest-only mortgage. RIO mortgages have repayment terms similar to lifetime mortgages in that they are repaid on a specific life event – either the death of the borrower, or a permanent move into residential care. But unlike a lifetime mortgage, interest is not rolled up. Instead, affordability revolves around borrowers’ ability to make the monthly interest payments. Ultimately, the loan is repaid through the sale of the property.
The FCA has also specified that advice is not compulsory for these mortgages, which means the product does not incur unnecessary costs and should be more accessible, as advisers do not need to hold any specialist qualifications to advise on them.
Other options
Several building societies now offer RIO mortgages, including Buckinghamshire, Leeds and Mansfield. As well as RIO mortgages and equity release products, lenders can also offer conventional capital-repayment and interest-only mortgages to older borrowers. Capital-repayment mortgages are more suitable for older borrowers with high pension incomes looking to make a major capital purchase, such as a second home. Monthly payments are likely to be high, as the loan will need to be repaid by the lender’s chosen maximum age.
Interest-only mortgages are more suited to those with a clear strategy for repaying the capital as a lump sum on maturity. They are suitable for older borrowers with assets that they plan to sell in the future, for example. Some lenders will accept the sale of the borrower’s residence as a suitable repayment strategy provided there is sufficient equity for them to downsize.
But as the IMLA points out, proving that payments are affordable for life is an issue for most borrowers.
Lending to older borrowers is not without additional risks. While lenders will always start by checking a borrower’s projected retirement age, plans can change and ill health, including mental incapacity, may hinder their ability to repay a mortgage in later life. As a result, some products are available with an option for lasting power of attorney.
