A new report from the Intermediary Mortgage Lenders Association (IMLA) has warned that mortgage lenders are from offering loans that stretch into people’s retirement.
The report examines the impact of post-financial crisis mortgage regulation on the growing army of ‘non-standard’ customers who fall outside the traditional core of salaried borrowers with no credit blemishes who can pay off their loans before a set retirement date.
IMLA argues that people seeking a loan which is likely to remain outstanding beyond their normal retirement age are suffering from a lack of clarity in the Mortgage Market Review (MMR) rules, which is resulting in older borrowers being frozen out.
The trade association explains that most private sector employees now hold defined contribution (DC) pensions, which often prevent accurate predictions of their pension income – making it hard for lenders to determine how affordable a loan may prove beyond the point of retirement.
With the MMR requiring lenders to ensure mortgages are affordable for the lifetime of the loan in order to ‘protect borrowers from themselves’, the scope for interpretation has convinced many lenders that lending into retirement now carries extra risk if borrowers find at a later date that their retirement income disappoints, IMLA warns.
In response, many mortgage lenders have imposed lower maximum age limits rather than risk future accusations of breaching the rules where customers’ pensions prove insufficient to keep up their mortgage repayments after they retire.
With house prices rising faster than incomes, many borrowers are not managing to purchase an appropriate family home until their forties or even fifties. But anyone over the age of 40 is seeking a loan with a standard term of 25 years will be borrowing beyond a normal retirement age of 65 and is liable to find their options restricted.
IMLA argues the upcoming thematic review of the MMR by the Financial Conduct Authority, which is set to examine responsible lending in the first half of 2015, must provide extra clarity so that lenders can offer the flexibility required to meet borrowers’ changing needs without fear of future censure.
Peter Williams, executive director of IMLA, said: “This issue goes beyond the transitional arrangements for existing borrowers, and means that efforts by the lending community to follow the spirit of MMR with new customers are being hampered by the very real concern that it may be cited against them in future
“Uncertain pension incomes make it difficult for lenders to assess mortgage affordability in later life, and this may become even harder when the new pension freedoms take effect next year. To avoid a situation where regulation brings about the extinction of mortgage terms that stretch into retirement, we need clarity and confirmation about where the boundaries of responsible lending truly lie.
“MMR has been a big step forwards but having put a strong framework in place for the future, attention must now focus on honing the template so the pendulum doesn’t swing too far towards conservatism. Wherever possible, protecting consumers from themselves should not rule out options that would benefit them financially and meet an obvious need.
“Restricting access to mortgage credit is the right decision in some circumstances for the consumers’ long term security, but equally there are situations when a refusal to lend can prove to be to the borrower’s financial detriment. We need to strike a balance and the FCA review will be vital so that an update to the MMR rules can iron out some of these creases.”
