Clarity is needed on what the regulator deems acceptable practice on lending into retirement, the Intermediary Mortgage Lenders Association said, stating this should form part of the Financial Conduct Authority’s thematic review of the mortgage market.
A new report by Imla warns that as a result of a lack of clarity, older borrowers are being frozen out if their loans will be outstanding beyond their retirement age.
Given that most private sector employees now hold defined contribution pensions – which make accurate predictions of their pension income difficult – lenders are finding it hard to determine how affordable a loan may prove beyond the point of retirement.
The MMR requires lenders to ensure mortgages are affordable for the lifetime of the loan, in order to ‘protect borrowers from themselves’, with many convinced that lending into retirement now carries extra risk if borrowers find retirement income insufficient at a later date.
As a consequence, Imla said many lenders have therefore 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 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.
The FCA’s thematic review of the MMR is set to examine responsible lending in the first half of 2015, with Imla arguing that it 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, commented that the situation 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.
He added: “Wherever possible, protecting consumers from themselves should not rule out options that would benefit them financially and meet an obvious need.”
Imla’s report also warned that while lenders have become more sensitive to borrowers with previous incidents of adverse credit – from missing a monthly phone payment to a serious loan default – the MMR has not greatly reduced the options for these consumers, except where heavy adverse credit is involved.
peter.walker@ft.com
