When I bought my first home more than 30 years ago, it was commonplace for many others in their 20s to do so. Most people took out 25-year repayment mortgages, which they successfully paid off long before thinking of retirement. That would still be a popular choice for those in their 20s today - but for too many it is unfortunately unattainable.
In the intervening period, aspirations to home-ownership among young people have remained as strong as ever, but housing affordability has become a massive barrier. The mortgage market has evolved to help customers’ aspirations, most recently with a focus on first-time buyers overcoming deposit challenges. But we haven’t been as focused on last-time buyers - something we are putting right with the CML’s retirement borrowing project.
So, when I spoke about this work at the recent FCA mortgage conference, I sought to address three key questions:
What does ‘old’ mean for mortgage customers, today and in the future?
We know that we have a dysfunctional housing market, but what are the specific problems for older borrowers?
That does our collective report card look like on addressing the issues raised by retirement borrowing? In other words, how successfully have lenders, builders, the government and regulators been in delivering the right outcomes? And how might they do better?
When I bought that first home in 1984, it would never have occurred to me to ask for a 40-year term. But some of today’s borrowers - even those who also get help from their parents - do need to consider that option. Meanwhile, against a backdrop in which UK life expectancy has increased by seven years just in the last three decades, older people are economically active for longer - either out of choice or necessity.
Fundamental questions
Given change on this scale, I think we need to consider some fundamental questions. For example, should it still be seen as some sort of personal failing not to have completely paid off your mortgage by the time you retire? What is wrong with owing - or borrowing - money in old age? And do we need to consider new mortgage models - perhaps ones that are fully paid down when customers are working, but where paying down can slow or even reverse to capitalisation when that is what customers need?
We hear a lot today about the bank of mum and dad. But, bearing in mind the staggering growth of housing wealth held by older people, this bank is barely open for business. It has assets on the balance sheet, but they are illiquid. It is not a cash pile, but an accumulation of spare rooms. The number of over-65s is growing, but hardly any of them move, and this tends to ‘lock in’ their assets. The small number of transactions involving older people means that their homes are not released for larger families to occupy or for re-development to provide housing that might be more attractive and suitable for an ageing population. That doesn’t look healthy.
The verdict: must try harder
So, what does the report card look like for those with a role to play in helping deliver a housing market that more effectively meets the needs of all people - young and old? In my view, the verdict collectively on lenders, builders, government and regulators will have a ring that is familiar to many schoolchildren: must try harder.
I cannot pretend that the CML has all the answers, but we are working towards at least some of them. Retirement borrowing has been one of our key projects this year and we are due to release a major report on this subject later this autumn.
For builders, a key question is: if there is such a massive opportunity to build more suitable homes for asset-rich older owner-occupiers, why are we not responding to it? Part of the answer, we know, is that there are restrictions caused by the planning system and a skills shortage. But what are the other problems to be addressed?
The government clearly wants a housing market that works better, but its emphasis is on helping younger buyers. There appears to be comparatively less attention on encouraging older people to move into homes that might better meet their needs, despite the enormous potential in freeing up under-used housing resources or equity that could help younger buyers.
In recent years, the lending industry has had to implement huge regulatory reforms. But although we now enjoy a productive and co-operative relationship with the regulator, have the new rules delivered all that we would have hoped for? The consensus on the mortgage market review says that some of the reforms have tended to restrict lending to older people, so are there any changes to be made?
Equity release is the answer for some, but the market remains small. Mainstream lenders will therefore need to play a much bigger role if we are to make serious inroads in addressing the challenges of retirement borrowing. When I asked the audience at that FCA conference an admittedly leading question about how well the mortgage industry served older people, a majority said poorly or not very well. Given that senior industry figures made up a large proportion of that audience, there is a clear recognition by lenders that they need to do more.
Finally, I asked a hypothetical question of the conference audience. What if more lending to older people delivered a great outcome for 98% of customers, but 2% had to sell to settle the debt? Would that outcome be a net benefit to society, or would the focus be on the 2% - with the reputational consequences for lenders which we can all imagine?
That is really the fundamental question. Exactly how certain must firms be about the outcome for all before we help older customers? As an industry, we need to work that through - and innovate to help older people.
