Equity Based Mortgage LendersShare-based mortgage lenders
Elderly borrower - debts and stock summit!
Recently we have analyzed our mortgage loan backlog figures to take a look at older borrower dwellings "balance sheets". "Our regulatory mortgage research includes approximately 979 billion of mortgage receivables in June 2016. That corresponds to around 91% of the entire owner-occupied mortgage portfolio.
Most of the 9% of owner-occupied mortgage lending not contained in our figures is non-regulated. Whilst we have no detail led on this small percentage of loan transactions, they will mostly be older mortgage transactions. By and large, therefore, these mortgage-backed securities are owned by older debtors and have a lower level of debts owed, both in real value and in real time.
If we are younger and at the beginning of our home trip, this guilt can seem discouraging. Somehow a hill of indebtedness is an unusually helpful metabolism. However, we all need to scramble up one side of this mortgage bandwidth before we can look about the debts and begin to really take into account the free (unencumbered) equity we have accumulated.
Figure 1 shows the indebtedness and free equity of mortgage creditors in various age groups. Importantly, it is important to keep in mind that this does not show the way of a particular borrower's debts and equity over its term as a mortgage. Rather, there is a momentary picture of the present mortgage-laden populace (with the exception of residential mortgages) who have purchased various types of property at different periods over a period of about 20 years.
There is a clear example of how this equity stack is gradually dominating the dwindling mortgage indebtedness as we move through time. The focus is on this hill of debts and behind it an equity summit that is remote at first. We can see that the 38 year olds have the most debts - 147,000 on averages.
And until they reach the age of 46, borrower mortgages remain higher than the equity they have accumulated. And as we move further up the agescale, we can see the heap of mortgage debts falling further away and becoming shadowed by a second summit of free residential property.
At 60 years of age the average mortgagee has a mortgage of £90,000 but a free equity of almost £150,000. critically, this shows the characteristic condition of those who person a security interest at all era and of education, by the case they deed 60, umpteen recipient person already reimbursed their security interest.
In this respect, the over 60s represent 21% of the UK economy but only 9% (around 600,000) of mortgage-owners. However, they keep much more than 14% of the entire equity of the mortgage keeping population. 14% of the mortgage keeping capital is owned by the mortgagee. In this way, we can get a clear idea of the equity securities of mortgage creditors - and both the chances and the challenge they will face in later lives as this participation grows.
Here it makes sense to consider two kinds of mortgages - amortization and interest only. Not only do each of them have a different profiles for how the net amount of borrowed capital and equity changes over the term of the mortgage, but also for the total participation sums. Both influence how the borrower can potentially use this equity if they so wish.
Chart 2 and 3 redraw the equity and liability overview shown in Chart 1, but broken down into amortization and pure interest rate mortgage loans. Mortgage redemption landscapes are basically a more pronounced form of the overall view, with debts peaking in the 1930s and borrower's equity capital exceeding mortgage debts from the ages of 45.
At 60, debtors have around 53,000 in debts and 135,000 in free equity. However, the situation is quite different for pure interest rate borrowers. The free equity only begins to surpass the loans' remaining debts when they reach the 60's stage - an era at which the median repo has already about 80,000 pounds more equity than debts.
Pure interest rate lending by default does not amortize and therefore has a lower equity formation than an equal redemption mortgage. And provided that the debtor has taken adequate precautions to pay back the originally raised equity, the ultimate equity interest at the due date is equal to 100%. Only interest-bearing debtors generally have higher borrowings and equity values than those with redemption mortgage payments.
E.g. the 55-year-old on a payback mortgage is now well above the first point and has almost twice as much equity as mortgage debts, while his or her age-mate has just arrived at the point where his or her free equity is as much as his or her debts. However, in total the free equity of the 55-year old pure interest debtor is 177,000 pounds per annum versus 127,000 pounds per annum for a repo debtor.
Overall, borrower 50 years and older own 28% of the mortgage debts, but 43% of the free equity. This corresponds to about 400 billion pounds of free equity for these older borrower. While we do not have the same level of detail for absolute ownership, a coarse estimation using HM Land Registry and English Housing Survey information indicates that mortgage-free homeowners over 50 years comfortable own over £1 trillion.
Nothing in our information tells us about the income of these borrower, neither currently nor retired. In many cases, it is likely that those with more residential property will also have a higher income and may therefore have less need to take advantage of this justice. Where this is not the case, however, the equity of older borrower is both an opportunitiy and a real test.
Older debtors are usually wealthy in assets with low-interest debts, but often have a relatively small bandwidth of possibilities. Almost half of the borrower's entire equity is in the hands of those for whom a mortgage with a typically 25-year maturity would typically extend well beyond the statutory pensioner' s years.
Lifelong mortgage loans provide a way for some to tap into their equity, but the predominant lending and rating requirements limit the amount for lenders at the younger end of the range. The LTV is also an important factor for non-life mortgage lenders, as it affects whether and how much they could borrow from a particular borrower. LTV is also an important tool for non-life mortgage lenders.
However, for borrower who wish to use mortgage financing to open up the real estate wealth, perhaps the downright equity capital levels are more relevant. Only interest debtors, although more limited by LTV policies, have more equity if it can be released in a sustained and affordably priced way. In view of the needs of a longer lived populace, the mortgage sector has been moving towards easing retirement limits.
In 2014, according to money facts, 5% of all retail mortgage product (with the exception of lifelong mortgages) was available to consumers on conditions that would make a borrower over 75 years old. However, at the beginning of 2016 it was 17%, and by the end of September 40% of the product was available up to this time.
The mortgage credit regime requires companies to take a "prudent and proportionate" view when evaluating old-age earnings, but to give little detail on how this could be done. Freedom from pensions has made it more difficult for both lenders and creditors to assess old-age incomes. However, the exemption by the Financial Conduct Authority to ease the affordable interest rate requirement for pure interest rate instruments, which will later become an interest rate rollup, is a useful one.
However, later models that completely close the divide between traditional amortization mortgage loans and old-age mortgage loans still need to be sensibly designed. Part of this positive development is that in this "younger older" group of people more and more of the pledged public will inevitably be present. They will also want to keep accessing mortgage loans for a wide range of purposes.
Making it easier for many to take out loans and use residential property more flexibly throughout their lives should be appealing at the microscopic scale. But the same degree of inflexibility could bring greater societal benefits, e.g. more room for "empty nests" to shrink sooner in their lives if they still need mortgage loans, but could otherwise hamper pension on the horizon. What's more, the same degree of inflexibility could also bring greater benefits for the elderly.
Innovating in this way to remove obstacles to more effective use of the UK residential property base could have an impact on the whole residential property supply chain for all, from the first buyer to the last seller. It becomes clear that there is about 400 billion pounds of free equity owned by the over-50s, which eclipses the total indebtedness of these borrower.
There are potentially significant benefits to the development of mortgage product offerings that allow borrower flexibility to tap into this equity in a way that complements our extended working and gaming lifes. With the right types of product, the right finance could be made available to a significant, expanding but still partly underserved part of the British people.