MortgagesJan 31 2019

What do clients need to know about suitability and risks?

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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.

A lifetime mortgage is just that – a lifetime commitment and so, it should not be entered into lightly.Stuart Wilson

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.”

To help assess suitability, equity release customers are encouraged to involve other members of their family.

Recent research by more2life shows 80 per cent of advisers believe family members should be involved in the equity release process.

Steve Paterson, director of Teeside Money, sums up some of the pros and cons of being an older mortgage client. These can provide a starting point for any adviser/client discussions.

Pros

  • The owner can remain in the property for life or on moving into long-term care.
  • No regular payments are required, although clients can opt to pay the interest and some of the capital without penalty on many products.
  • Plans guarantee that if the loan exceeds the value of the property, the lender will not require the excess to be repaid (lifetime mortgages).
  • The cash raised is free of tax and can be used for any purpose.
  • Most schemes are portable.

Cons

  • The house is mortgaged again and this will reduce the value of the estate.
  • The debt can roll up quickly.
  • There are charges involved and some people are reluctant to take out another mortgage.
  • Means tested benefits can be affected.
  • Home reversion schemes involve the customer giving away all or part ownership of the home.

Protection conversation

Advisers with older mortgage clients may also want to strike up the protection conversation with them.

According to Emma Walker, chief marketing officer at Lifesearch: “In 2018, we advised over four times the number of clients from the age demographic 60 and over looking for protection to cover their mortgage needs than in 2017. 

“We expect to see the number increase again 2019.”

As Rob Harvey, head of protection advice at Drewberry, observes, people are requiring mortgage protection increasingly into later life.

“The most obvious mortgage protection is life insurance, which we're seeing individuals need to increasingly advanced ages as their mortgages stretch for longer,” he explains. 

“The cost of life insurance rises as you get older and the longer you need it for, but even then, it's not as expensive as most people think.”

eleanor.duncan@ft.com