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Clarity on lending near retirement

Paul Smee MS blog

Early next month, a legislative ban will come into place stopping discrimination on the basis of age in the provision of services and public functions. This addendum to the Equality Act 2010 will make it unlawful to use age as a reason to prevent a person obtaining a particular service.

The financial services industry is listed among those services exempted from the statutory ban, with financial services firms able to operate policies that prohibit the provision of services above a maximum age, but only if deemed sufficiently risky.

What constitutes “sufficiently risky”, as far as mortgages are concerned, is a grey area and one that lenders have sought further clarification and guidance.

Generally, there is still a fair degree of confusion about just where the mortgage industry sits when it comes to lending to people on the edge of retirement.

As borrowers consider taking the step from salary to pension, lenders are faced with assessing the suitability of a candidate without necessarily knowing when a person might retire, their likely pension amount, and other potential income streams they might have.

The FSA’s most recent edition of its Mortgage Market Review consultation paper acknowledged that lenders could not be expected to crystal ball gaze when it came to predicting changes to income and expenditure over the life of a mortgage. We welcomed this change and have asserted that lenders need a degree of flexibility when considering lending into retirement.

The FSA would like lenders to adopt a “prudent and proportionate” approach to assessing income where the mortgage term extends beyond the state pension age of the applicant.

That means, for example, a lender should take more robust steps to assess income when an applicant is closer to retirement.

We have since made the point that there needs to be more clarity about what constitutes “close” to retirement and what should be considered “years” away.

So, until there is more guidance from the regulator, the Treasury and, perhaps in time, from the courts, lenders are navigating through muddy waters.

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  • Grey Haired Underwriter 2nd October 2012 at 12:04 pm

    The whole issue of lending into retirement has always been fraught with ‘grey’ issues. The classic example is the use of the statement ‘normal retirement age’ What is normal retirement age when life expectancy is changing year on year and when people are having to work longer because pension provisions just aren’t good enough for them to retire. So if a 55 year old comes looking for a 25 year mortgage and says they will work to 80 am I supposed to conclude that this is ‘cloud cuckoo land’ or am I to assume that it is a fair possibility that he/she will survive to that age. But will a tradesman, carrying out physical work, be less able to continue working to that age than say a cashier at a supermarket or an office worker and would it be discriminatory to make assumptions on that basis?

    We also know that, at the present time, most private pensions are payable through the male applicant and that up until recently the male of the species tended to have a lesser life expectancy (I gather that this is changing). This leaves the issue as to whether the survivor, in the event of first death, will have sufficient income to cover off the mortgage payments. No lender is going to want to see a ‘little old lady’ thrown out in the street and I know from experience that the good intentions to trade down in such circumstances rarely materialise. It has to be considered that the remaining borrower will be suffering from the severe loss of a life partner and is unlikely to also want to face up to the idea of moving to a new area where he or she would not have existing connections to help ward of loneliness or even help with shopping etc.

    Personally I find it quite difficult to make judgement as to when someone is likely to die but to some extent that is what is being expected of me. Personally I would be happy to offer an old style maturity loan whereby the term of the loan almost guarantees that it will expire after the demise of the borrower(s) and where the loan is repaid by the Estate but would such a situation be classified as being, in effect, an equity release product for which there are separate authorisations from our ’beloved’ Regulator.

    This whole is issue is one that needs to be properly addressed by the Regulator but is another classic situation whereby the lender is expected to use best judgement without detailed guidance and if it goes wrong the regulator would then state that the lender was irresponsible. A typical damned if we do and damned if we don’t.

    Yes, this is a difficult issue but it would do no harm to have some form of common sense guidance passed down from on high so that we lenders know that are behaving in a way that doesn’t leave us vulnerable to sanctions or even to a tightening of the Regulator regime

  • Natalie Manchester 29th September 2012 at 10:53 pm

    As long as we have proof of retirement income on file and the mortgage will still be affordable on this income then surely this would be classed less risky as the income is guaranteed rather than someone who is employed who could be made redundant and the income reduced or ceased.

  • Natalie Manchester 29th September 2012 at 10:52 pm

    As long as we have proof of retirement income on file and the mortgage will still be affordable on this income then surely this would be classed less risky as the income is guaranteed rather than someone who is employed who could be made redundant and the income reduced or ceased.

  • Toddy 29th September 2012 at 1:32 pm

    I think clarity needs to come from EU as they appear to be running the show these days…

  • Toddy 29th September 2012 at 1:32 pm

    I think the clarity needs to come from EU as they appear to be running the show these days…