Sarah Davidson reports on the efforts being made across the industry to improve borrowing options for the silver-haired generation
Capital
Along with regulation and advice structures, funding has been the third conundrum facing this sector. Fundamental to the reason there is a disconnect between traditional mortgages and lifetime mortgages is the capital treatment of each. Mortgages are written on a credit-based assessment of the borrower’s ability to repay; lifetime mortgages are written on an actuarial-based assessment of the borrower’s longevity and house price inflation forecasts. Add into the mix the fact that mortgage funding turns over on a one to two year basis and compare that to the fact that lifetime mortgages are match-funded over the lifetime of the loan – which could be several decades. The providers of each have been different due in large part to their funding models. Lifetime mortgages don’t sit well on bank or building society balance sheets while for pension and annuity providers such as Partnership, LV= or Aviva the asset class is a good fit for matching duration.
This dynamic is beginning to shift however. Providers – most notably Legal & General – are increasingly finding ways to bring larger sums into the equity release and lifetime mortgage markets. Since its launch last year L&G has lent over £300m on equity release proving the market has the potential to grow quickly.
Equally, new lenders funded by private equity firms also have a golden opportunity – New Street Mortgages and Kensington Mortgages are backed by TPG and Blackstone, both firms which have easy access to large scale capital. It’s not a huge jump to foresee firms like these fund lenders like Kensington and New Street using separate balance sheets for lifetime lending and borrowing long from pension funds looking for stable, safe returns. That wouldn’t preclude those lenders from continuing to lend traditional mortgages funded traditionally on one to two year capital.
