Later life mortgages: Will people really still be working at 90?
28 February 2020
We are living in a time of significant socioeconomic change. Over the last 30 years house prices have increased, in real terms, by 259% across England and Wales, while wages increased by just 68%, according to ONS figures.
This has resulted in two major mortgage market trends. Firstly, people are purchasing properties later in life. Secondly, mortgage terms are increasing beyond the ‘typical’ 25 years to make them more affordable.
This means more people are borrowing into later life, creating new risks and exacerbating existing ones. One particular risk which has caught my eye, and seemingly the eye of the Financial Conduct Authority (FCA) too, is the plausibility, or likelihood, of homeowners sustaining income levels throughout the mortgage, where they get very close to their stated retirement age.
Correctly assessing this is vital. Mortgage providers catering for later life lending should ensure they are prepared for FCA scrutiny regarding the plausibility of income over the term of the mortgage. But how can they make such an assessment involving so many uncertainties, about situations many years in the future? And what should they take into account when assessing affordability into later life?
Although you should form your own view on what is or isn’t plausible, and develop a rationale for this assessment, general factors which may impact plausibility include:
- the applicant’s age at the end of the term
- whether the applicant is employed or self-employed
- the strenuous or stressful nature of their role, including long or unsociable hours
- the presence of significant overtime or commission-based income
- high earnings which may not to be sustained into later life
- age limits and generally accepted retirement ages for certain occupations
- multiple occupations or “second jobs”, including any passive income
- for self-employed applicants, whether employees or succession plans are present.
Forming this view can be challenging, but it is possible. What matters most is how this is embedded into your underwriting procedures to ensure a consistent level of scrutiny across every case. I believe assessing plausibility is a key first step when rationalising later life lending, to which proportionality can then be applied to mitigate risks, where appropriate. This supports a robust thought process for both internal compliance teams and regulators, and avoids complacency.
But while firms can strengthen their processes for later life lending in this way, I believe the FCA has a responsibility to react to market changes. The Mortgage Conduct of Business Sourcebook (MCOBS) was formed in a world where 25 year mortgages were the norm. But is it still right for today’s customer? Could additional guidance on longer-term mortgages be beneficial? I think so, but any changes would take time.
Nevertheless, as mortgage products adapt to meet changing demand, lenders have a responsibility to ensure their policies and procedures evolve to mitigate new and exacerbated risks, such as the plausibility of income. If they don’t, the consequences for them and their customers could be serious - potentially leaving older and vulnerable customers with affordability issues, and lenders facing supervisory action.