One of the defining features of a lifetime mortgage is that borrowers typically do not have to make any payments until they die or move into long-term care.
But since late 2023, high interest rates have pushed some equity release lenders to innovate by introducing mandatory payment products.
More2life, for example, has launched a Flexi Payment Term Lifetime Mortgage, requiring contractual payments of partial interest up to the age of 66 before continuing as a roll-up mortgage.
The product is targeted at customers aged between 55 and 62, who can commit to paying part of the interest to access higher loan-to-values than would normally be available in a full roll-up lifetime mortgage.
“A lot of this stems from the fiscal event at the end of 2022,” says More2life managing director, Ben Waugh. “We saw interest rates rise and that meant that our lifetime interest rates also went up. Also because of the way they work, LTVs came down.”
And with lower LTVs, Waugh says this created a group of customers that More2life could no longer lend to.
Indeed, before mandatory payment products were available, Chris Bibby, managing director at Key Advice, says the firm found themselves turning applicants away because they could not offer them the LTV that was needed.
“The sharp rise in interest rates post "mini"-Budget simultaneously drove a sizeable shrinkage of available LTVs in traditional lifetime mortgages, particularly for younger later-life borrowers. This created a significant cohort of homeowners who could not be helped.
“At the same time, the needs of these customers became more acute, driven by the interest rate shock in mainstream mortgage products, as many saw their monthly mortgage payments become unmanageable.”
Another lender that has launched a payment term lifetime mortgage is Legal & General Home Finance, whose product is available to over 50s.
Product director Andrew Gilbert likewise says the provider identified significant segments of customers who were unable to release as much equity as they wanted through an interest roll-up lifetime mortgage.
“We believe our new payment term lifetime mortgage can help,” says Gilbert. “There was a smaller though still significant number of homeowners who were looking at lifetime mortgages, but were under 55.
“We also saw a fairly high proportion of retirement interest-only mortgage applicants who failed affordability based on their lifetime income, but who would pass based on their pre-retirement income only.”
Regulation spurring innovation
It is important for the sector to continue to innovate to ensure customers have access to a broad range of products that better suit their specific needs, says Gilbert, and that need is reinforced by the Financial Conduct Authority's consumer duty.
And at More2life, Waugh says the duty’s products and services outcome was part of the reason for the lender launching its mandatory payment product.
“The other thing to bring into this is the FCA’s review of [later-life mortgage] advice in September,” says Waugh. “I think what that's brought home again is that, particularly for younger borrowers, their choices used to be a traditional mortgage or equity release.
