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When Pat Trotter decided she needed a new kitchen in the two-bedroom flat in Romford she had lived in for more than 30 years, she knew her financing options would be limited. Aged 78, the former auxiliary nurse had retired at 60 and was living on a small pension.
Rising property prices, however, gave her another alternative: equity release. The value of her property had risen significantly since she bought for £87,000, leaving her with an asset worth £225,000.
Having talked it through with her four surviving children, she took out an equity release loan of £24,000 at 6.49 per cent a year: instead of requiring monthly repayments, interest would accumulate on the loan until she left the house, either upon her death or if she moved into a care home.
The lump sum covered not only her home improvements, but also the remaining unpaid portion of her mortgage. “I knew then the flat was paid for,” Mrs Trotter said.
Though it accounts for a fraction of the mortgage market — £1.6bn against £220bn in 2015 — equity release has been growing at a clip in the past five years. After lending totals expanded by 16 per cent in 2015, in the first quarter of this year they hit a record £394m, 21 per cent up on the same period in 2015, according to the Equity Release Council, which represents companies in the sector.
For older homeowners who fall into “asset-rich, cash-poor” category, it has offered a way of unlocking the value of their properties, whether for home improvements, care costs or better living standards.
But recent moves by mainstream mortgage lenders to appeal to older borrowers are opening new opportunities for those looking to free up some of their property value later in life — without recourse to equity release.
Halifax and Nationwide — between them responsible for one-third of residential mortgage lending — this month lifted the age limits by which a borrower must pay off their mortgage in full. Smaller lenders, in particular building societies, are increasingly innovating to allow older borrowers access to the housing market or to unlock equity in their homes.
What will the changes mean for those borrowing in retirement and in the run-up to it? Will mainstream mortgage providers succeed in breaking down the barriers preventing older people from borrowing? And will that put the brakes on growth in the equity release market? FT Money has assessed the widening mortgage options — and risks — for older homeowners looking to capitalise on what is typically their most valuable asset.
Mortgage borrowing vs equity release
Adrian Anderson is unusual among mortgage brokers in being trained to advise both on conventional mortgages and equity release. The two are “quite different”, says the director at Anderson Harris, both in the way products are structured and the demands they place on the borrower.
When deciding whether to lend, a mortgage provider would mainly looking at two things: the size of the borrower’s income and how the loan is going to be repaid. Getting adequate answers to these questions is now built in to the mortgage process through the Mortgage Market Review, which imposed tougher requirements on lenders in 2014.
With an equity release loan, by contrast, interest accumulates over time — and is paid off through the sale of the house at the end of the term. So a borrower (or borrowers, if a second person such as a spouse is also on the loan) may not need any income to qualify.
Another important difference, Mr Anderson adds, is their rates and fees: a conventional mortgage lasting 25 years might be priced at about 1.3 per cent for a two-year fix or 2.3 per cent for a five-year fix, assuming a 40 per cent deposit, though there are examples of rates on either side of this. An equity release mortgage might charge interest of 5 per cent or more — depending on the proportion of the loan to the value of the house — and total set-up fees of £1,800- £2,000.
Over time, this difference in interest rates can lead to a gulf in overall costs. A debt carrying a 6 per cent interest rate doubles roughly every 12 years. Someone taking out a £50,000 equity release loan, who goes on to live another 24 years, would pay back about £200,000 when their home is sold — money that might otherwise have gone to their beneficiaries.
Many advisers therefore recommend waiting as long as you possibly can before taking out such a loan. Mr Anderson says: “If someone were introduced to us who was aged 65 we’d definitely try and make it work with a normal mortgage. The rates would be lower, the fees would be smaller.” A borrower capable of making repayments on a conventional mortgage would retain a greater portion of equity in their home as a result, rather than see it eaten up by rising interest under equity release.
So why are an increasing number of homeowners choosing the latter? Often, because in retirement or when approaching it, they have neither the income nor any other means of paying off a mortgage, so are refused a loan by banks or building societies. Mainstream lenders, chastened by the consequences of loose lending in the run-up to the financial crisis, also imposed fixed age barriers, even barring many applicants with a good income in retirement, whether from pensions or investments.
Older homeowners on interest-only mortgages with no obvious way of repaying the capital have been particularly ill-served by age caps. Unless they want to downsize — which will not suit everyone — they can find it impossible to move to a repayment mortgage, since the age limit shrinks the term length and pushes up repayments beyond the bounds of affordability.
Key Retirement, an equity release provider, said last week that lump sum mortgages (as opposed to those where the loan is drawn down over time), had surged to a 40 per cent share of the sector in the first three months of this year, compared with 30 per cent in the same period in 2015 — a trend it put squarely down to looming interest-only mortgage due dates.
The hybrid option
For some, equity release is seen as the only option, in spite of lingering memories of the 1980s, when its reputation was scarred by unsafe loans involving variable interest rates, high commission rates and unsuitable links to bond-related investments. In response, the industry moved to clean up its act with more rigorous advice procedures and a series of agreed principles to protect borrowers.
Another reason for its growth, according to Andrea Rozario, chief executive of Bower Retirement, the specialist adviser which helped arrange Ms Trotter’s equity release loan, is that people often underestimate both their increased longevity and the costs they will face, either in terms of medical care or modifying their home to cope with reduced mobility in old age. “The majority don’t really plan for the changes that are specific to getting older,” she says.
She argues that equity release offers the protection that no borrower risks being forced from their home before the need for a move to a care home — or their death — requires it, as well as an agreement among lenders that a borrower can never end up owing more than the value of their house, known as the “no negative equity guarantee”. If a borrower defaults on a mainstream mortgage, by contrast, repossession remains the ultimate sanction.
Innovation has also brought new kinds of equity release loan on to the market in recent years. Hybrid loans allow borrowers to service the interest on an equity release loan for a number of years when their income is still flowing, putting off the moment when debt starts racking up, thus preserving more of their equity.
“This was really about the equity release lenders realising that the old mortgage market wasn’t serving customers as well as it should,” says David Hollingworth, director at broker London & Country Mortgages.
The impact of equity release on a borrower’s beneficiaries remains contentious, however. While lenders advise borrowers to discuss the effects of a loan with their children, there is no requirement for them to do so; there will still be occasions when offspring discover to their surprise that a parent has done a deal that has effectively handed a lender much, or all of the value of a family home.
Ms Rozario says it is nearly always best if the borrower and their family discuss a loan openly, but this does not mean it is fair to blame a borrower who chooses not to. Some may have well-founded fears that their rapacious offspring, eyeing an early inheritance, will encourage them to take out more. “The borrower needs to be protected. You can’t assume the kids will always have the parents’ best interests at heart,” she says.
A mortgaged alternative
While equity release has been expanding, the conventional mortgage market is undergoing change as mainstream lenders have moved to ease the barriers to older-age lending. Halifax this month extended the age limit for “mortgage maturity” to 80, while Nationwide said its existing customers could take out new loans as long as they were repaid by 85, up from 75.
Mark Bogard, chief executive of Family Building Society and National Counties Building Society, a smaller lender which already offers loans to older people, says those who can sustain some form of mortgage payment in old age should consider this type of loan — particularly when low-cost examples are available in the form of interest-only mortgages. One type of loan might be structured as half interest-only and half capital repayment, with a view to downsizing at the end of the term to pay off the balance. “That seems to be a much better option for people for whom a mortgage is affordable,” he says.
Making an informed decision about whether to sign up to a mortgage or take the equity release route is often complicated by the lack of professional staff qualified to advise on these areas in combination with considerations about investments, pensions and debt that should feed into the decision.
Brokers will typically focus either on the mainstream mortgage market or equity release, since the specialist training required for each is different — let alone the qualifications needed for investment advice. But as the options for older people widen, advisers capable of taking a view across a client’s complete financial landscape are likely to appear in greater numbers. Mr Bogard says: “The customer is badly served by the splitting of investment and mortgage advisers. Old people make hard cases when things go wrong.”
At the very least, lenders will have to go further in managing the demographic shift towards increased longevity and longer working lives. Mr Hollingworth believes this means banks will have to make further adjustments to their loan criteria rather than kicking the can down the road by adopting a policy of continual forbearance to those elderly borrowers on interest-only mortgages without repayment options. “People would rather be empowered with choices in how they deal with it. Rather than saying we’ll give you another five years, let’s have some options.”
Taking out a mortgage in your seventies
After five years of expat living in rural France following their retirement, Roger and Gay Brough decided they wanted to move back to the UK to be closer to their children and grandchildren.
The first property they bought, near Cheltenham, did not turn out to be right for the couple. Instead, they decided to downsize, choosing a recently refurbished property close to the Forest of Dean, with a garden and a new kitchen.
In spite of the age limits commonly imposed by lenders on older borrowers — Mr Brough is 72, his wife 71 — the couple were able to use pension income to qualify for a mortgage with National Counties Building Society, which has lent to borrowers up to the age of 89. With the house valued at £165,000, the Broughs last year took out an interest-only mortgage of £60,000 over a 12-year term, starting with a three-year fixed rate of 3.59 per cent.
Mr Brough, who formerly worked in the textile industry and has income from a number of pension policies, said he preferred the option of a modest mortgage over equity release: “You don’t want to give up equity in the house.”
The issue of home loans for older borrowers has come to the fore as an ageing population has suffered from lenders’ imposition of more stringent rules on affordability. As companies have phased out final salary pensions, income in retirement has become less generous and more volatile, meaning fewer people in retirement are able to prove they can afford to pay back a home loan in old age.
Several smaller lenders promote mortgage deals that can help those barred from the mainstream market, however. Hodge Lifetime, for instance, offers several types of “retirement mortgages” including an interest-only deal with an age limit of 95, as well as a lifetime mortgage option — a version of equity release.
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