Robin Feith, chief executive officer at the Building Societies Association, looks at how mortgages are changing to fit in with today’s world of an aging population and higher house prices.
Blue Planet returned to our screens this autumn after sixteen long years. Fans of Sir David Attenborough – and who isn’t – are being treated to many wonders of the Animal Kingdom, including a horrifying 40kg fish, which can jump out of the sea and pluck birds from the sky. Truly horrifying.
Closer to home in the Financial Kingdom we are finding again that the humble mortgage is an adaptable creature. Species such as repayment, interest-only and offset mortgages are well known to the general public. Newer ‘lifeforms’ such as self-build, shared ownership and Buy-for-Uni mortgages can be found among building societies in particular.
Longer mortgage terms
In the current regulatory environment, the mortgage continues to find new ways to evolve. One of the most striking features is the trend towards increasing mortgage terms. Following a period of sustained house price inflation, with the vast majority of mortgages now on a repayment basis, this trend is unsurprising. As the BSA stated in its 2017’s Lending into Retirement update, UK Finance Regulated Mortgage Survey figures show that in the first six months of 2017, 43% of new mortgages sold by building societies were for a term of 25 years or longer.
This trend is something that regulators are aware of. In July, Sam Woods of the Prudential Regulatory Authority released his speech Looking both ways, which examined the history of prudential supervision and current credit risk appetites. In it he comments that, ‘where 25 years might once have been the normal maximum term for a mortgage, now 35 years or even longer seems to be increasingly common’. While this is strictly true, still only 4% of building society mortgages were for longer than 35 years in H1 2017, edging up from 3% over the whole of 2016. This compares to 19% of loans with terms of 30-35 years and 20% with terms of 25-30 years in the first half of 2017.
This is more than just picking at numbers. The difference between a 30-35-years term and a 35-years plus term can make big difference for someone approaching retirement. Again, this goes back to a point Sam Woods makes in his speech that longer terms increase ‘the possibility that the final instalments may have to be met from post-retirement income’. However if we accept the Cridland Review, then state pension age will be at least 68 by the time the average person taking out a mortgage today reaches retirement age.
It is also important to take into account peoples’ changing lifestyles. For one, retirement is increasingly becoming a process rather than an event. ONS figures show that one in ten people over the age of 65 are still working. Pension freedoms have similarly multiplied the number of options when thinking about what retirement ‘looks like’.
Of course, we will see a growth of mortgage borrowing into retirement over the coming decades. The demographic and economic factors are such that our report with the International Longevity Centre UK earlier this year forecast mortgage debt in the over-65s reaching almost £40 billion by 2030 on current trends.
This shift is already showing up in the numbers. Looking again at UK Finance Regulated Mortgage Survey data, there has been a 45% increase in the number of mortgages building societies sold which will mature when the borrower is 65 or older, comparing H1 2017 with two years earlier. That was just before the BSA launched its interim report on Lending into Retirement, which led to a number of building societies raising or removing their age limits.
At the older end of the scale, there has been a 162% increase in mortgages maturing between ages 79-84 over the same period. While the absolute numbers involved are small – and we wouldn’t want them to become a significant part of the market – this shows that there is demand from some credit-worthy older borrowers to take a mortgage into their eighties.
Retirement interest-only mortgage
In future, some of these borrowers may opt to take a retirement interest-only mortgage. The Financial Conduct Authority opened the door wider to these in a consultation earlier in the autumn. The BSA believes that these products are an important bridge between the standard residential market and lifetime mortgage space.
If the right consumer protections are built-in then why shouldn’t a borrower with sufficient retirement income to repay the interest on their mortgage be able to opt to repay the capital from housing equity?
It will not be the right option for everyone and most people will still want to have their mortgage paid off. However, this latest evolution in the way we buy our homes shows that, just like in the Animal Kingdom, financial products can adapt to their environments.
Source: Mortgage Finance Gazette