Tapping into the £153bn later-life lending market

While the end to the default retirement age had, perhaps, less impact on that immediate cohort of retirees, today increasing numbers of people are working well into what was traditionally retirement – either through choice or necessity.

With demographic as well as social change meaning that people are reaching milestones like homeownership, marriage and children later than before, this flexibility has been a huge boon. It has also seen the rise of products that are aimed at over-55s and the mortgage market has been no different.

While equity release has been available for more than 30 years, we recently saw retirement interest-only (RIO) mortgages and later-life mortgages enter the equation as the idea of a distinct later-life lending market became a reality.  

51 per cent of advisers reported an increase in later-life lending enquiries over the past 12 months.

Naturally, there are challenges, and I think most people would agree that more consideration needs to be given as to how these products can interact within the market to deliver the best customer outcomes. 

There was also the elephant in the room in that while there was general consensus that the market had significant potential, no one had as yet sized it in its entirety. 

A study carried out by Key Group with AKG Financial Analytics suggested that the market is approximately £153.9bn, which apart from being a big figure is also an important figure as the sector needs to be correctly defined, sized and monitored to establish how it could and arguably should evolve.

The size of the later-life lending market and its future

AKG defined the market as “standard, RIO or equity release mortgages for borrowers over the age of 55 with terms that extend into, or start during, retirement”.

That was a definition built on the work by UK Finance, the Equity Release Council, the Association of Mortgage Intermediaries, The Investing and Savings Alliance and the Building Societies Association last year.

Analysis shows over-55s have existing mortgage borrowing – standard, RIO and equity release – of around £99bn, while annual new lending across all products is worth up to £14.9bn.

Customers are coming to the end of mortgage terms with either no repayment vehicles or one that has failed to perform.

On top of that, over-55s switch a further £40bn of products a year.

While the figures speak for themselves, advisers surveyed also felt the market would continue to grow.

Indeed, more than half of advisers (51 per cent) reported an increase in later-life lending enquiries over the past 12 months. That rises to 58 per cent who expect a rise in enquiries over the next 12 months. 

The future is arguably even brighter, with 77 per cent predicting a rise in enquiries from customers about later-life lending over the next two to five years, while 79 per cent predict an increase over the next six to 10 years.

What is driving the market?

Advisers highlight interest-only mortgage redemptions as a key issue in the development of the market.

Customers are coming to the end of mortgage terms with either no repayment vehicles or one that has failed to perform. 

Nearly six out of 10 (59 per cent) of advisers questioned for the research pinpointed the issue and more than 260,000 customers are estimated to face endowment shortfalls by the Financial Conduct Authority.

But there is a lot more to market growth than just the fallout from endowment mis-selling.

Advisers surveyed for the report stressed that later-life lending is helping people maintain their lifestyles by addressing retirement income concerns, and also coping with the fact that running out of money in retirement is entirely possible.

With the end of the default retirement age came the end of the ‘traditional’ retirement.

And right now retirement finances are under even greater pressure than ever before with the cost of living crisis having a huge impact, especially on those receiving fixed incomes. Key’s own data shows customers are using equity release plans to manage their finances with more money taken out in further advances and drawdown compared to last year. 

This is where later-life lending product innovation and evolution have helped enormously.

Advisers acknowledge that lenders have helped create the market and grow it – nearly a third (29 per cent) said the increased flexibility of equity release plans has made products more attractive, while around one in five (18 per cent) say mortgage lenders making longer terms available past traditional retirement ages is boosting the market.

Serving customers wants and needs

With the end of the default retirement age came the end of the ‘traditional’ retirement. And this has also brought about a different attitude to managing finances in later life as more and more consumers over the age of 65 navigate a more fluid path to a life after work.

In reality, many over-55s are facing retirement with concerns about their retirement income, providing ongoing care and support to elderly parents and adult children still living at home, and also with different attitudes to borrowing in retirement to previous generations.

22 per cent admitted they were not financially prepared.

The AKG report found just 11 per cent of over-55s felt they were well-prepared financially for retirement, with another 42 per cent saying they were financially prepared but cautious or worried.

More than one in five (22 per cent) admitted they were not financially prepared, while another 10 per cent said they were unprepared but relaxed.

Attitudes to borrowing in later life are also more relaxed than might have been the case with older generations – around 27 per cent said they would consider borrowing in later life if their retirement income was not sufficient.

New life for later-life lending

Putting a figure on the size of the later-life lending market helps the industry understand what has developed and more importantly to understand what will continue to develop as the need for borrowing in later life is not going away.

At Key Group, one of the areas that we feel is likely to grow – especially with the consumer duty on the horizon – is partnerships between different advisers. 

Whether they are independent financial advisers, equity release specialists or tax planning consultants, each group will have customer needs that are better met by trusted specialists in their respective fields. 

Identifying the potential of this £153.9bn market is just the first step.

While the idea of someone who is able to provide truly holistic advice might seem sensible, the practicalities mean that this is very hard to achieve. 

However, adviser training and qualifications do need to evolve to ensure that there are better hand-offs between practices and a deeper understanding of when this needs to happen.

Identifying the potential of this £153.9bn market is just the first step, we now need to consider how we solve some of the challenges facing us and at the same time ensure that good customer outcomes remain the focus as the sector lives up to its potential. 

Stuart Wilson is corporate marketing director at Key Group