Throwing off the MMR shackles: Can lenders develop the right products for older borrowers?

The FCA’s call for flexible mortgage products for older borrowers could be held back by regulatory constraints and misselling fears.

As the first products for retirees emerge, experts warn the market is fraught with difficulties.

So what will products for older borrowers look like? And how can lenders ensure they are both commercially viable and suitable?

MMR constraints

Last week, FCA director of supervision for the retail and authorisations division Jonathan Davidson urged lenders to develop more flexible products for older borrowers.

Lending into retirement has become one of the biggest issues in the mortgage market since the MMR. Before the rules were rolled out in April 2014, many lenders cut their maximum age limits to 70 or 75, making it more difficult for borrowers to obtain finance if the loan extended into retirement.

More rigorous affordability assessments and a clampdown on interest-only lending has further restricted options for older customers.

Also last week, building societies committed to reviewing their maximum age limits as part of a report on lending into retirement from the Building Societies Association.

Many building societies already lend up to age 80 thanks to their manual underwriting processes.

But in response to rising demand, a number have recently launched specific products for older borrowers.

New products

Stockport-based Vernon Building Society launched a retirement mortgage in July aimed at those with a pension income.

The five-year discount rate is available up to a maximum loan-to-value of 50 per cent. It can be taken out on a repayment or an interest-only basis, where sale of the property upon death or downsizing is an acceptable repayment vehicle.

The mutual says the product is typically taken out on an interest-only basis and is currently only sold directly, although there are plans to open it out to brokers.

Head of sales and marketing Ian Keeling says: “We have introduced an enhanced sales process with advisers qualified to the same standards as for equity release. That means they can discuss things like wills, health and the impact on family. If we expand distribution we need to ensure all customers fully understand the risks. We have also priced in the complexity of this product and its higher risks. If you have an older book of borrowers, your administration will increase.”

The society offers a lower rate for those who have appointed a lasting power of attorney at 3.7 per cent compared with 4.45 per cent for those who have not.

Keeling says: “If someone has appointed an LPA, we know if they lose mental capacity during the term of the loan, there is someone we can speak to. Otherwise things could get messy for a year or so while that is sorted out, when bank accounts may be temporarily frozen.”

Marsden Building Society laun-ched a product earlier this year aimed at those aged 55 to 85.

Operations manager Heather Crinion says: “Equity release is not right for everyone so we believe there is a gap in between that and a traditional repayment mortgage.”

She says the lender will consider all types of pension income, but final salary schemes are “more straightforward”.

Marsden has set up a new affordability calculator for older borrowers, which takes the spending patterns of retirees into account. For example, it accounts for higher heating costs but lower travel expenses.

Crinion says: “We also apply a higher stress level because in times of stress the options open to  employed borrowers, such as taking a second job, are unlikely to be available to retirees. We are very cautious on affordability.”

The product allows downsizing as an interest-only repayment strategy, but Crinion acknowledges when borrowers come to the end of their term they may not want to move out of their home. She says: “In this scenario they could move to equity release to repay the loan. We will help them through that and not just abandon them: we are  looking for an equity release provider to refer customers to.”

Marsden says it is also in the early stages of developing a product for those approaching retirement while Bath Building Society has plans to offer a retirement mortgage.

Crinion says: “We want to have a range of products so that people can come to us at any stage of their life. The challenge with a product for those approaching retirement is obtaining accurate forecasts of future pension income.”

Regulatory fears

Under the MMR, the FCA allows downsizing as a repayment strategy for interest-only, provided it is “credible”. This means it is unlikely to be an option for those already in a small property.

The FCA also says “speculative” strategies, such as those reliant on rising house prices, are not acceptable.

A number of major lenders do not allow downsizing as a repayment strategy. Independent regulatory consultant Richard Hobbs says the standards of the MMR need to be reduced if more flexible products are to be developed.

But he says: “The punt with interest-only that lenders, the regulator and individuals have to make is that there will not be a severe shock to property prices.”

Building societies are also restricted by rules from the Prudential Regulation Authority which state lifetime mortgages should not account for more than 10 per cent of their lending.

One small mutual told Money Marketing they had been told by the PRA that an interest-only mortgage for retirees was classified as a lifetime mortgage, but told by the FCA it is not.

Furthermore, small building societies do not have the capacity to serve high demand. Building societies account for around 30 per cent of new lending. The Vernon lent just £46m in 2014 compared with £40bn for Lloyds Banking Group.

BSA head of mortgage policy Paul Broadhead says: “Building societies are leading the way on this, but we need the banks to come on board. I have not had any conversations with them so far, but we need an industry-wide solution.”

The Council of Mortgage Lenders says it plans to publish policy proposals on lending to older borrowers in the coming weeks. A spokesman says its members remain concerned over the affordability rules of the MMR.

Regulatory consultant and former FSA head of retail policy David Severn says big lenders’ reluctance is understandable, given past scandals such as home income plans.

He says: “What if interest rates rocket? What if property prices slump? What if stock markets take a nosedive?

“Lenders need to be honest and upfront with customers about what the risks could be. Otherwise there is a risk for the industry and regulator of some very bad press: elderly people being made homeless because their flexible product has proved to be flawed.”

Crinion adds: “A retirement mortgage is not a lifetime mortgage, but we believe it is best practice to discuss all the things that you would do for a lifetime mortgage, such as care costs. We also give customers a 14-day cooling-off period. Building societies are a lot better placed to deliver that individual service to potentially vulnerable consumers.”

Adviser view

David Hollingworth

Associate director of communications

London & Country

We will need bigger take-up and changes across the industry to ensure older borrowers are not excluded. While hybrid equity release products are one option, a lot of older people are looking for fairly standard borrowing and can demonstrate good pension income. The starting point should be a review of maximum age limits.

Expert view

Currently there are three types of mortgage on offer: a traditional mortgage repaid before retirement; an interest-only retirement mortgage; and equity release.

A borrower with a repayment mortgage may wish to switch to interest-only as they enter retirement and their income drops. Later on, if they incur an unexpected cost such as home care they may wish to convert the loan to a lifetime mortgage where the interest rolls up. That is what the customer journey looks like, but it does not describe a product that is currently available.

A borrower who needs to release equity from their home to pay for care is making that decision at a time of acute stress. It would be better to bring that financial planning forward and build more flexibility into the mortgage at an earlier stage.

If a borrower wanted to switch to an equity release product now they would need to change providers and move to a deal with different terms.

The main difference is a lender has the power to repossess with a mortgage into retirement, but that is not possible with equity release.

Another difficulty is funding. If you are lending to someone where the loan will be repaid on death, lenders have no idea when that will be. There needs to be greater links with pension providers, as they have much more data on life expectancy.

We also need to think about whether developments such as shared ownership could be extended to older borrowers.

The way we work and the way we buy homes has changed massively over the past 30 years but the mortgage market does not yet reflect that.

Paul Broadhead is head of mortgage policy at the Building Societies Association