The increasing demand for equity release, which at the half way point of 2017 had increased in new customer numbers by 44% over the same period of 2016, shows no sign of slowing. Whilst a wide increase in demand for access to lending for those approaching, at or in retirement, is being fuelled by strong demand in existing usage areas the most dominant being home and garden improvement, mortgage repayment is starting to rise more than any other. We are all familiar with the fact that interest only maturities are driving this increase in demand, there is something else happening which is making lifetime mortgages specifically more attractive to would be borrowers and that is the fact that with the right insight and advice many of the current products on offer can replicate a more traditional mortgage.
There are two major enhancements which have emerged of late which are helping older borrowers see that lifetime lending can be a real alternative to mainstream borrowing once the options are better understood in context. The first is the option to service interest monthly rather than have a roll-up loan and the second is the option for voluntary repayments. The latter allows ad hoc payments to be made of up to 10% of the original capital borrowed every year, whilst the former allows either full interest only payments to be made, or partial interest only and partial roll-up but with one major difference, this option requires no affordability assessment. The reason why is that there can be no default on the loan. If the client at any time either cannot or does not want to continue servicing the loan there is an automatic conversion to roll-up.
The option to service the loan without the affordability requirement is enabling those customers who want an interest only loan and know they can afford it, but also know that in the future circumstances will, or may, change, the flexibility to cater for the day when they may not want or be able to service. For those who don’t wish to commit to a regular monthly payment borrowers are able to utilise the voluntary repayment option, commencing with a roll-up loan they can still erode the debt should they wish offsetting both the interest and capital through paying up to the 10% allowance.
Whilst out of context these options may look cumbersome or complex, in the context of a client wanting to borrow and in a way that looks and feels like mainstream, these options do just that, but in a way which provide great flexibility and protection when a clients’ circumstances change.
If like many brokers who we engage with, you are finding clients even requiring conservative LTV requirements who are not passing affordability tests don’t assume that serviceable borrowing is not an option. Also do not underestimate the power of a solution for older borrowers, such as explained here, that offers a fixed interest rate for life. Solutions for older borrowers are extending, and as they do being able to service that demand either through advising or referring to a specialist will become ever more important.
Chief Product Officer