Younger borrowers opting for interest-serviced lifetime mortgages

Interest-serviced lifetime mortgages are attracting a younger borrower profile, according to new data from Canada Life Home Finance.

Analysis of customer data from the first six months since the launch of Canada Life’s Advantage product shows that borrowers taking the interest-servicing option are typically younger and have lower loan-to-value ratios than customers using traditional roll-up lifetime mortgages.

Advantage was launched in February and offers customers a discounted interest rate when they commit to making regular monthly interest payments.

Customers can choose to service 25%, 50%, 75% or 100% of their monthly interest, with the available discount increasing according to the proportion of interest paid.

The average age of an Advantage customer is 66, compared with 69 among customers using Canada Life’s Capital Select range, which does not offer the same interest-servicing option.

The data also shows a high level of take-up for the full interest-servicing option. Some 86% of Advantage customers have opted to service 100% of their monthly interest, securing the highest available rate discount. Just 1% chose the 25% interest-servicing option.

Advantage customers have an average loan-to-value of 24%, indicating that they are retaining a significant proportion of equity in their properties.

Joint applications are also more common among Advantage borrowers, accounting for 51% of applications compared with 39% for Capital Select customers.

The reasons for borrowing also differ between the two customer groups, with Advantage customers more likely to use the funds for existing debt and mortgage repayment than for discretionary spending.

Almost half (48%) of Advantage customers used their lifetime mortgage to repay an existing mortgage, compared with 28% of Capital Select customers.

Debt consolidation was the second most common use of funds, cited by 31% of Advantage customers compared with 23% of Capital Select customers.

By comparison, 9% of Advantage customers used the funds for day-to-day living costs, compared with 27% of Capital Select customers.

Holidays were also less common among Advantage customers, accounting for 9% of borrowing compared with 23% for Capital Select customers.

Alice Watson, head of home finance at Canada Life (pictured), said: “We can see from the first six months of Advantage data that interest-serviced lifetime mortgage products are attracting younger, low loan-to-value borrowers with strong payment discipline.

“For some, the certainty of regular interest payments and a lower rate will be the right choice. For others, the flexibility offered by a traditional roll-up lifetime mortgage with ad-hoc repayment options will remain a better fit.

“As customer needs evolve, continued product innovation is critical for the lifetime mortgage market to develop and support a wider range of retirees. Providing advisers and their clients with a broader range of solutions means greater choice for homeowners looking to use their property wealth to sustain their retirement income and achieve greater financial flexibility in later life.”