Expert believes older homeowners have been underserved
The arrival of Consumer Duty is going to cause a seismic shift in mortgage lending, particularly for borrowers over the age of 50.
That’s the verdict of Leon Diamond (pictured), chief executive and founder of LiveMore, who said people aged 50- to 90-plus looking to take out a mortgage have been terribly underserved.
“Regardless of their income status, life experiences, or impeccable credit histories, many older borrowers are often excluded by traditional lenders; not only is this unfair, but it does not make good business sense,” said Diamond.
So how will Consumer Duty challenge age-based affordability tests moving forward?
The case for later life lending
The over-55s are living longer than ever; since 2020, and, despite the pandemic, the United Nations predicts it will rise by another 5%, to 85, by 2050.
“Government figures from the Office of National Statistics estimate that the UK’s over-55s are sitting on a net property fortune of £4.4 trillion, a staggering figure,” Diamond said.
In addition, according to statistics from Experian, Diamond said the UK’s over-55s have the highest average credit score, at 863, in the country. By comparison, people in their early 30s have the lowest average credit score, at 770.
In other words, Diamond said, many over-55s have significant property wealth, and he believes later-life borrowers should be treated as reliable consumers of financial products.
“However, even if they can get a mortgage, they can sometimes be directed to deals which are not the best for them, or which require them to jump through more challenging affordability hoops,” he said.
What’s going on with affordability tests?
Diamond said there are disparities for later life borrowers around ‘affordability’ tests; if you are aged 55 or over and you want to apply for a retirement interest-only mortgage, for example, you typically have to pass three affordability tests.
“These are conducted now, at retirement, and, if it is a joint mortgage application, upon the death of either borrower,” he added.
Diamond said that Consumer Duty will not directly change the three-pronged affordability test, but it will impact the way rules should be applied by placing the customer at the heart of the journey.
“So, as an example, if a borrower wanted a loan of £100,000 on an interest-only basis until they were 80 before downsizing, then the outcome should not be solely determined by a lender’s affordability model that trims the term to 75,” he said.
In this case, Diamond said the mortgage adviser should consider what mortgage options will be available between the ages of 75 and 80 to ensure that the customer’s desired outcome is achieved.
Moving forward, Diamond expects to see changes in the use of affordability models to prevent bad outcomes.
“This represents not so much a change in rules, rather than behaviour; lending should be driven by the outcome, not the calculation,” Diamond said.
However, Diamond said, as it stands, if you are 55, due to retire at 67 and paying into a ‘mainstream’ mortgage until the age of 75, you only have to pass the ‘now’ test. As such, Diamond questioned whether it is fair to set such a high bar for affordability based entirely on age.
He believes the transparency demanded by Consumer Duty should eradicate this kind of inconsistency when it comes to affordability requirements. “It will mean the customers’ needs come first, and those in the sector who focus on providing the best products and outcomes for their customers will thrive,” Diamond said.
This openness at the selling stage, combined with marketing clarity and a proper understanding of customer vulnerability, Diamond said, will usher in a new era where lenders and intermediaries must prioritise products which best suit customers, rather than being influenced by those which offer the best commission.
“This approach is long overdue in our sector; for a market that has long been underserved, the arrival of Consumer Duty is wonderful news,” he said.
The introduction, Diamond said, should mean an end to the frustration felt by later-life borrowers who have robust payment records and income sources, but are told that they no longer qualify for a mortgage.
“If you can afford a mortgage, you should never be ‘too old’ to secure one,” Diamond said.
How do you expect Consumer Duty to challenge age-based affordability tests? Let us know in the comment section below.
