A new report has shown that one group, traditionally thought to be nearing the peak of their earnings potential, are at risk of being frozen out of the mortgage market.
The problem is due to new rules, known as the Mortgage Market Review (MMR) which was introduced by the Financial Conduct Authority (FCA) earlier this year.
The aim of the new rules was to ensure that borrowers could repay the money lent to them. But one of the effects has been to restrict lending to people who will still have a mortgage when they retire.
Therefore for anyone taking out a traditional 25 year mortgage may find it difficult to obtain a loan when they reach 45; or in some cases even younger.
Frozen out in your 40s
In fact 24 banks and building societies, which make up the Intermediary Mortgage Lenders Association (IMLA), say the issue is “causing real concern”.
The group, including the Nationwide Building Society and Santander, believe the new rules are stopping mortgages being offered to anyone who will retire before the end of the loan, amid fears of a “future clampdown” by the regulator.
The group are concerned that with retirement dates no longer fixed and pensioner incomes harder to predict after the demise of Final Salary pensions, lenders are finding it harder to confirm affordability past retirement. The MMR requires lenders to ensure that the borrower can afford to make repayments throughout the life of the loan; something which is hard to do if the future retirement income is in doubt.
Some lenders, nervous of falling foul of the regulator, have therefore imposed tough conditions, to ensure loans will be repaid in full before a borrower retires.
In years gone by this might not have been such a problem, but with house prices rising sharply over the past couple of years and stagnant wage growth, many borrowers are now moving house in the 40s or even 50s. With lenders worried about mortgages extending into retirement, older borrowers, normally thought to be in an excellent position to secure a loan, will find their options restricted or will have to arrange their mortgage over a shorter term; which will push payments up and ironically will cause problems with affordability.
Peter Williams, Executive Director of IMLA, said: “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.”
Williams continued: “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.” (Source: IMLA)