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.