LSE surveyed almost 1,000 members of Family Building Society to find out what sort of people aged over 60 withdraw equity from their homes, how they decide on which option to choose and what they do with the funds released.
Mark Bogard, CEO of Family Building Society, noted that people are living 20 years longer than pre-World War 2, and our financial architecture does not reflect how we live today. The pension system was set up when life expectancy was shorter and people would be mortgage-free in their 50s.
Today is very different with more people going into retirement in mortgage debt and younger people relying on the Bank of Mum and Dad or schemes such as Help to Buy and shared ownership to get on the property ladder.
The respondents in the survey were homeowners who were a mix of borrowers and savers with the society. The majority lived in the south of England, were married, fairly affluent, had adult children and wanted to remain in the home they lived in. Only 10% said they wanted to downsize within the next five years, going up to 20% in the next 10 years.
Out of the sample of 956 people, less than a third had remortgaged or taken out an equity release plan and almost two thirds of these had released equity for other expenditure – only 24 had opted for equity release. The most common use of the funds was to make home or garden improvements, followed by helping children or grandchildren to buy their first home.
Kath Scanlon, one of the authors of the report, ‘Later life borrowing in a world that’s living longer’, said it was notable that only one person in the survey used the equity to pay for care. How to pay for long-term care is a key concern for government.
She said that higher housing transaction costs especially stamp duty, discourage people from downsizing and there may also be issues around inheritance tax.
The options for later life lending have increased with many lenders now having no age limit on being a mortgage borrower and there are more flexible equity release products. However, Scanlon said there was still a suspicion of equity release, although 69% of respondents said they would use the value of their home as part of a long-term financial strategy.
There is also now a new product on the market – retirement interest-only (RIO) – following a softening of attitude from the regulator.
Scanlon said: “RIOs should appeal to many but only a few hundred have been taken out since there were introduced in 2018. Many people are unaware of RIOs but often the affordability assessment rules people out; a couple have to prove that if one of them dies the other can afford to repay the mortgage.”
Mark Bogard, CEO of Family Building Society, said: “The biggest gap is that people don’t know about RIOs or that they can get a mortgage into older age.
“There is also a lack of holistic advice. Equity release advisers may not advise on mortgages and mortgage advisers might not be qualified to advise on equity release. There is also the issue of financial planning advice with investments and tax.
He also mentioned the regulatory balancing act that lenders have to deal with. The Prudential Regulatory Authority wants reassurance that the lending is not risky and repossession would be carried out if necessary but the Financial Conduct Authority wants customers to be treated fairly and not be repossessed, especially if they are elderly and vulnerable.
