It’s the traditional perception of equity release and lifetime mortgages that is holding back the market from its full growth potential.

Equity release has been habitually described as a long-term loan secured against the value of a home which customers can apply for any time after they turn 55. Customers borrow a cash lump sum but there are no monthly payments. Instead, interest builds up for as long as you have the mortgage and is charged on the total amount borrowed and the compound interest added.

This traditional view does not reflect today’s market and needs to be turned on its head for both advisers and customers. The challenge for advisers is to convince customers that making payments to mitigate the impact of interest accumulating is in their long-term interests.

Research from Air shows that is not happening yet – nearly half (45%) of later life advisers using the sourcing tool had not searched using the affordability (repayment) toggles available in the last 12 months.

They may be surprised that affordability toggles exist – but they do, and affordability assessments are central to the choices advisers offer clients.

The nature of retirement is changing and as many customers look to transition to work less as they get older, modern later life mortgage products will be essential in allowing flexibility.

The benefits of monthly payments

Coming into the advice process, many equity release customers will have the expectation that no monthly repayments are needed – and indeed this is often a significant reason for being attracted to the product given the stress many face in trying to make ends meet each month and having prioritised mortgage repayments over many years.

However, the numbers show that making some level of repayment is better value in the long-run and ensures more options are open down the line.

Making regular payments on a lifetime mortgage controls the roll-up of interest not only for the benefit of the estate but also protecting the equity in the customer’s home so that they if they want to borrow more in the future (or to remortgage to a lower rate product) they potentially can do so. Depending on the product chosen making regular payments may also mean a lower rate of interest is available from day one.

Take the example of a 55-year-old releasing £40,635 on a £189,000 property. Using representative current interest rates of 6.99% MER available on lifetime mortgages, with no repayments after 27 years the total cost of borrowing will be £266,788. Paying £70 a month on the same interest rate will mean a total cost of borrowing £222,587 after 27 years.

That’s a saving of £44, 201 but if the monthly payments go up to £338 a month the savings go up to £196,822. In addition, the borrower has retained equity of £322,602.

With the modern lifetime mortgage products now available, customers can choose their monthly payment amount and payment term subject to minimum and maximum terms and there is no set percentage of interest payments.

Customer circumstances

Lenders have adapted to the profile and circumstances of customers now seeking later life lending options and advisers should too. Assessing affordability is critical to ensuring all options are considered, not only when it comes to ruling in or out mainstream mortgages, RIOs and TIOs but also in getting to the right lifetime mortgage recommendation.

Innovation for equity release lenders has focused on products that cater for those who can and want to make payments, providing further benefits particularly in terms of lower rates and potentially lower early repayment charges (ERCs).

New products offer a price discount based on how much the client can pay each month which significantly reduces borrowing over the loan term even for smaller amounts. Some products offer payment holidays of up to three months and allow customers miss up to two payments in a 12-month period and still keep the discount.

Advisers have to be careful with affordability assessments and have comprehensive conversations with customers focusing on income, needs and wants. Income should include guaranteed income and sustainable regular income as well as any reductions to income coming up such as working fewer hours or stopping work.

An income assessment clearly should not include bonuses or any income that is not guaranteed or any anticipated future income such as gifts or windfalls.

Needs include contractual commitments and essential living costs for them and their pets. It should include insurance, travel costs and habits. Expenses that can be put off or they can live without can be ignored.

When it comes to wants it should include spending that that maintains their quality of life such as home entertainment.

Whilst not a requirement of lifetime mortgage lenders, advisers may want to ask customers for bank statements in order that they can properly validate the income and expenditure information being provided and/or offer the customer budget tools/calculators so that they can do a full assessment of their own circumstances.

Getting to an accurate position is critical as, even when it comes to lifetime mortgages, recommending a product with repayments that are not sustainable can create a risk to outcomes.

Meeting regulatory obligations 

In their recent ‘Dear CEO’ letter to mortgage intermediaries the FCA stated:

‘We want to see firms do more to ensure customers have considered their options. Firms must consider customers’ personal and financial circumstances, financial objectives, and provide appropriate information to enable them to make effective decisions. This may include probing customers’ stated preferences and exploring any trade-offs with those who express contradictory or conflicting needs.’

This fits with the need for comprehensive conversations with all later life lending customers and the requirement to look at affordability irrespective of the product type being considered.

Furthermore, the ERC requires members to act at all times to deliver good outcomes for  customers and offer products that suit their needs best. That should include appropriate details of income and expenditure being collected.

That said, payments must be affordable and customers must not be placed in unsuitable or unaffordable products.

Mainstream advisers need to recognise the innovation that has taken place in the lifetime mortgage sector and, with interest-served options being available, ensure that all products are considered when dealing with over-50s customers. Similarly, equity release specialists must adjust to  put affordability at the centre of the advice process.

Not only will this help confirm whether a lifetime mortgage is more suitable than other later life lending alternatives but also how repayments can be used to manage the cost of borrowing.  Embedding these changes in approach will not only  deliver great customer outcomes, it will ensure that the traditional perceptions of equity release will be consigned to history and move the product from a niche to a norm.

Will Hale is chief executive of Air