Death taxes and now mortgages
It used to be said that the only certainties in life were death and taxes, but perhaps we should now add mortgages (or debt) to life’s certainties. UK Finance reported this week that more than half of new mortgage borrowers will still have a mortgage when they turn 65. However, is Later Life Lending a triumph for the financial services sector or a failure of it?
Is rising debt the new rising damp?
In 2014, around one-third of new mortgage lending went beyond the borrowers 65th birthday, but for the first time this year, that figure has risen above 50%.
Why are we borrowing more in later life?
In our view this rising debt is caused by several factors: rising house prices, availability of credit and lenders also suggest the impact of an ageing population.
Availability of credit
To some extent, the availability of credit has fuelled house price inflation. If you can borrow more, you have more to spend and if you spend more on your house purchase, house prices will rise. Since the Global Financial Crisis mortgage lending criteria has been tightened with respect to affordability ratios, however one way around these restrictions is to increase the term (length) of the mortgage. Borrowing £250,000 over 30 years will have a lower monthly repayment than borrowing the same amount over 25 years. Initially, this looks like a win-win, but perhaps the lender is the only real winner as whilst the monthly repayments are lower, the amount of interest paid over the life of the mortgage will be much higher.
Rising house prices
House prices have risen significantly during the COVID-19 pandemic, but house prices have been on the rise for much longer than that and in our view house prices have become divorced from wages, which means homebuyers need to borrow more to buy a home. Ironically this divorce has been caused, in part, by rising homeownership and the emergence of the Bank of Mum and Dad. As more parents pass on housing wealth to their children and grandchildren house prices rise. Those lucky enough to receive cash from the Bank of Mum and Dad do not borrow less, rather they use this extra cash on top of the mortgage debt they can secure rather than instead of it.
We are not wholly convinced by the ‘ageing population’ argument for greater indebtedness. We appreciate that if you live longer, there is an argument for saying that your demand for certain products such as mortgages continues, it doesn’t stop just because you reach a certain age. BUT, we have yet to meet someone who wakes up in the morning wishing they had more debt. We are sure that most would prefer not to have a mortgage than have one as they turn 65.
Charles Roe, Director of Mortgages at UK Finance (the trade body of the banking and finance industry) said ‘There’s been a growing demand for mortgages from those aged over 55 and this is set to continue as more people live and work for longer’.
Is later life lending a problem rather than a solution?
UK Finance’s Charles Roe again
“Later life lending both now and in the future will be imperative as existing homeowners look to later life products for accessing equity as they get older.”
We were struck by the use of the word ‘imperative’ above, implying that the growth of later life lending is crucial, of vital importance. This suggests to us that the growth in later life lending is addressing a problem rather than a lifestyle choice.
Jam today has to be paid for tomorrow
Later life lending is not a free ride. It is likely to force many to work for longer and remain in the workplace longer than they had originally intended in order to repay the later life loan.
In our view, the growth in later life lending points to the growing pension crisis and perhaps the acceleration in the former reflects an acceleration in the latter. As we said earlier, no one wakes up in the morning wishing they had more debt and it is our view that many are turning to later life lending to top up inadequate pensions.
Equity release – just debt by another name
Jim Boyd the Chief Executive of the Equity Release Council commented that:
“Attitudes towards home finance in later life have changed, and homeowners are increasingly comfortable with mortgage borrowing into retirement and open to the benefits of releasing some of their property wealth as they age”
We have an issue with the term ‘equity release’, because, in our view, homeowners taking advantage of equity release are essentially taking on debt rather than releasing equity.
We do not have an issue with releasing equity, where debt is not involved. It seems sensible to us for a household to utilise its assets to fund its retirement, however, the traditional equity release providers do not currently offer such a product.
Fractional homeownership – a better solution
We believe that a better alternative to later life lending is fractional ownership. This would allow everyone to accumulate and consume housing wealth. Those climbing the housing ladder would be able to accumulate housing wealth at their own pace and those looking to consume their housing wealth could do so without taking on the burden of debt.
We believe that if we have to add to life’s certainties ‘death taxes AND homeownership for all’ is a better alternative than ‘death, taxes AND debt’