What do clients need to know about suitability and risks?

This article is part of
Guide to later life mortgages

What do clients need to know about suitability and risks?

There has been a proliferation of mortgage products aimed at older borrowers, and longer mortgage terms are becoming the norm.

But later life mortgage customers and their advisers need to understand the risks involved in still repaying a mortgage, or having a property-related financial commitment, into their 70s, 80s or even 90s.

Affordability is the main concern for advisers with older mortgage clients as, typically, a person’s income falls when they retire.

It will be up to the adviser to flag this at an early stage of the advice process.

Damian Thompson, director of mortgages at Aldermore, recognises Baby Boomers are a financially diverse group of people with a wide range of retirement goals.

Mr Thompson says: “Affordability is key and has a different set of criteria than other lending categories. 

“Advisers will need to understand how the borrower lives and then deliver financial products that cater to their needs.”

He explains: “Borrowers should be assessed using the lowest annual income the borrower will receive over the term, take into account financial changes moving from employment to retirement, ensure joint borrowers can afford the mortgage independently and work at a lower growth assumption than forecast in case of a future economic downturn.”

David Hollingworth agrees on the importance of affordability when weighing the risks to older mortgage clients.

“Still having a monthly mortgage payment to meet will affect the choices open to retired borrowers,” he points out.

But it is also important that older borrowers feel their choices are not entirely limited by their age.

Mr Hollingworth says: “They [retired borrowers] saw themselves being shut out of the mortgage market despite having an established and guaranteed post-retirement income from their pension. 

“These borrowers are often happy to continue with an existing mortgage or to withdraw equity from the home, whether to improve the property, fund lifestyle or even help younger generations of their family.”

For life

Stuart Wilson, corporate marketing director at more2life, acknowledges retirement interest-only mortgages and later life mortgages do provide older or retired clients with more options, but suggests affordability can be “a hurdle”.

“In order to access these products, a client would need a guaranteed income – and if it is a joint life product, each partner needs to be able to meet these costs on their own should their partner die,” he notes.

He reasons this is why equity release can be a more suitable option for some later life borrowers.

“However, a lifetime mortgage is just that – a lifetime commitment and so, it should not be entered into lightly,” Mr Wilson cautions. 

“That said, today’s equity release plans have many customer-centric protections in place leading to high customer satisfaction levels. Lifetime mortgages do not usually require the client to make any interest or capital repayments, which avoids the affordability issues, but many plans offer people the option to do so if they wish to avoid compound interest.”