Blog Type, IPT Blog, Industry Sector, Finance | November 2016
Financial Services: Living longer and lending later
The UK’s population is ageing; the percentage of over-65s is expected to represent 25% of the total population by 2034 (ONS, 2015). Figures suggest that in 2014 there were 11.6 million people over the age of 65 living in the UK, this figure is estimated to rise to 17.3 million within the next 20 years (BSA, 2015). This changing demographic will create new opportunities and challenges for UK regulators and firms within the financial services industry. The question is, how can building societies and other financial institutions meet the needs of an ageing population who are looking to borrow later in life for longer periods of time?
On Thursday 20 October, the Industry and Parliament Trust (IPT) hosted a breakfast meeting discussing how the financial services industry can tackle issues surrounding the ageing population and the effect it has on the mortgage market. By bringing together industry specialists and parliamentarians this meeting created a platform for discussion on optimising the current and future changes in the market.
Inter-generational challenges are continuing to affect the housing market. In 2014 the average age of an unassisted first-time buyer was 31 (BSA, 2015). Due to a crisis of affordability and limited housing stock, parents are often left with the burden of assisting their children to make their first step onto the property ladder, and where parents can’t do this, younger generations have no other option than to rent privately. Mortgages therefore need to be adapted to better meet the needs of everyday consumers who are becoming home owners later in life.
There needs to be a suitable lending solution for both first-time and last-time buyers. The key determinant here is housing need, not having the right type of housing available is causing further challenge for the market as ‘right sizing’ is becoming increasingly important.
The lending response
The challenges outlined above have led to a noticeable shift towards increased flexibility for older borrowers. This can be seen through the recognition from lenders that consumers are borrowing for longer periods, even into and in retirement. Lenders also have to be mindful that older consumers are a diverse population facing a number of other issues for example, health concerns. The lending community must ensure that people can continue to access the services they need with appropriate consumer protection. Market research suggests that the introduction of the pension freedoms in April 2015 could also have a significant effect on increasing the risk of lending to borrowers close to or into retirement.
Following new regulatory changes 72% of the BSA members are now lending to borrowers up to, or beyond, the age of 80 (BSA, 2016). Further to these changes, the BSA has formed a cross-industry alliance including representatives from the Government and industry regulators. The main purpose of this working group is to discuss changes in the financial services landscape where older people are affected. It remains crucial to remember that every consumer runs the risk of becoming vulnerable due to their personal circumstances, no matter their age. Therefore, creating innovative and flexible approaches to lending should benefit everyone.
The Financial Conduct Authority is interested in products being developed to bridge the gap between traditional and lifetime mortgages to make mortgages more accessible to older generations and fully consider the role of equity release in lifetime mortgages.
Even though market regulators and firms now have a better understanding and can carefully manage the different risks of lending to older borrowers there is still work to be done. The challenge now remains to continuously future proof the financial services industry to meet the needs of the UK’s ageing population. It remains vital that building societies, parliamentarians, and regulators work together to create innovative solutions to meet the needs and adapt to these changes, always ensuring the appropriate consumer protection.
Words by Radhika Madlani, Parliamentary Affairs Officer