30 September 2023

Later life lending – is it time for an upgrade?

By Tim Sorrell, National Account Manager, Perenna

Growing older… the one thing we cannot stop

People are living longer, working longer and retiring later. This is a trend that has been gathering pace over recent years, but (dare I say it), the mortgage market has not kept up!

If you think about a typical 1930’s house, it is very compartmentalised. There is a separate kitchen, dining room and living space. Fit for purpose perhaps, but nevertheless has fallen out of favour.  In recent times, we have seen a switch to more open plan arrangements where you can be together whilst cooking, eating and doing homework. In short, the structure of our houses has moved with our lifestyles.

Could the same be said about our later life mortgage market? It works, but perhaps it’s time for an upgrade? Maybe now is the time to bring the market in line with how we want to live?   

There was lots of talk in the industry from 2010 onwards about later life lending which in turn lead to RIOs (retirement interest only mortgages). The idea was that RIOs would assist and give greater choice to the consumer - and to a degree this worked... A move from costly equity release (which was perhaps the only option via a Lifetime mortgage) to interest only, which instead protected equity and inheritance for families.

But does this do enough? Is more innovation needed?

Some could argue that not all people want interest only and this in itself is a more expensive option compared to a repayment mortgage where the capital (not just interest) is being reduced.

Repayment (which may be preferred if available) is usually the better option, however, it comes with lender concerns over long term affordability. Especially with lenders stress testing, looking at maximum age & proof of income in a market where relatively short- term fixed rate products are the only option on offer.

A further change is needed. If we think about that 1930s house, it feels like there’s more work to be done, before it’s quite right for 2023 living.

So what’s the answer?

I’d say a long-term fixed rate repayment mortgage, without reversion, would certainly do the job.

A longer-term product where the monthly payment does not change for the life of the loan, providing stability and certainty.

And that’s where Perenna comes in. Perenna mortgages are financed through long term covered bonds rather than retail deposits. This allows Perenna to offer a longer-term option to borrowers. It means there’s now an option where homeowners needn’t worry about rates changing or being denied access to products as they approach retirement. The short ERC of 5 years provides flexibility too.

Why shouldn’t it be feasible to use a pension for monthly mortgage payments? This should be an individual choice. Surely a happy retirement means financial freedom and choice? Longer term options should not be out of reach where suitable for the individual. And with no age limits, Perenna’s approach supports this. It's that extra step towards the open plan arrangements of the modern-day house!

This style of lending on a longer term fixed could certainly be used as an option to exit RIO/TIO. And thinking about cost, a longer term alternative should be more cost efficient than the current options of rolled up interest, or monthly interest only.

There is definitely a gap in the market and I, for one, would welcome more activity and competition in this space. After all, variety is the spice of life!

So, with consumer duty seeking better outcomes for borrowers, an alternative option in the later life lending space could certainly be something for consideration And we are keen to have that discussion with you!

For adviser use only. Please note this content has been supplied by our lender partner and as such, is their responsibility. No party shall have any right of action against Legal & General in relation to the accuracy or completeness of the information in this article.