The UK mortgage landscape has evolved significantly over the last decade, with mortgage terms increasingly extending beyond the traditional 25 years. This trend is likely to push the average age of borrowers upward.
Notably, we’ve also seen a sharp rise in new loans to borrowers in their 50s and 60s, with 35,840 new mortgages advanced to this group in Q4 2024 alone, according to UK Finance.
While it may be unpalatable to some, the mortgage product lifecycle has clearly extended to accommodate an increasingly older borrower base.
The mortgage industry has, to some extent, adapted to support this demographic through later-life lending products such as Home Equity Release and Retirement Interest Only (RIO) mortgages.
However, as many reading this article will attest, these solutions are not suitable for all. For those who require a standard residential mortgage but fall into what is now being called the ‘pre-retirement’ segment, there is a growing relevance in a lesser-known and underutilised solution: pension backed lending.
This type of lending applies specifically to personal pensions, including money purchase plans and Self Invested Personal Pensions (SIPPS). As of 2023, total UK pension assets stood at £3.8trn encompassing both defined benefit (DB) and defined contribution (DC) schemes.
The DC market, which includes personal pensions and SIPPs accounts for around £1.9 trillion of that total. The SIPP segment alone is currently valued at approximately £500bn and is projected to grow to £750bn by 2030. It would be fair to say this is a market with considerable substance and opportunity.
One of the key barriers for older borrowers is proving affordability when approaching retirement. As they near the end of their working lives, many borrowers face affordability constraints as lenders restrict mortgage terms and borrowing amounts aligning these with retirement dates.
This can prove frustrating for individuals with substantial financial reserves held in pensions, who are nonetheless constrained by the lenders traditional approach to assessing affordability.
This is where pension backed lending presents a compelling alternative. While many advisers understand that pensions can be accessed to support mortgage payments, its less well known that even pensions not yet drawn can provide valuable insight into a borrowers overall financial strength and future repayment capacity.
At the Scottish Building Society, we’ve already seen how using pensions as part of the underwriting suite of solutions can unlock solutions for borrowers who may otherwise fall outside conventional lending criteria.
Take, for example, a typical scenario involving a couple in their mid- fifties, asset rich but with low levels of income. By evaluating a significant uncrystallised SIPP we were able to support the borrowers’ objectives which presented a lower risk profile than their profile might suggest.
This approach is timely and responsible. Aging borrowers are a UK-wide phenomenon and are one reason why we are now accepting business beyond our traditional heartlands into The Midlands and beyond.
Looking ahead, we believe there is an opportunity for mortgage lenders, in particular mutuals, to support this important cohort. With more people entering later life asset-rich but income-light, the traditional approach to lending does not need to be a barrier to supporting this important group.
When understood and used appropriately, pensions can help unlock access to capital empowering homeownership choices. At a time when the mortgage market is searching for new sources of growth and relevance, pension backed lending offers a practical tool within an adviser’s armoury.
Stephen Brown is head of intermediaries at The Scottish Building Society
