Ageism in the Mortgage Market
Posted on 12 November 2014 by
When older borrowers approach the end of their mortgage term most lenders will grant an extension of 6 months or a year, if requested, but will charge their SVR rather than offer a good rate. This is actually very profitable for the lender as most people in this situation have plenty of equity and therefore the lender is at no risk of losing money but is getting a high interest rate in relation to the risk. Obviously the risk is different for the minority of people in this situation who have little equity.
We have seen little change in lenders’ policy in relation to older borrowers recently but Santander has said it is considering offering its customers an option to extend their mortgage on an interest only or roll up basis and if it implements this policy in the new year I think that will be a catalyst for other lenders to offer something similar.
The mortgage market is very incestuous and if one of the major players changes policy other lenders will reassess their own criteria. Furthermore lenders are under pressure from the FCA to treat their older customers fairly and not repossess. Fear of the regulator has been a factor in lenders’ ageism policies, but pressure from the regulator may now help to mitigate the problem.
The basic issue for most of our older clients who want to extend their mortgage is that they want an interest only mortgage and so they fall foul of two restrictions imposed by most lenders – maximum age and interest only. The maximum age restrictions (65 – 75 with most lenders) mean that for those still working, taking pension income into account when assessing affordability is not relevant. For those who have retired, or partially retired, the only income most lenders take into account is pension income and any earned income, although a few of the smaller manual underwriting lenders will also consider investment income.
Another problem with many lenders is that they will only assess affordability on a repayment basis, even when the repayment strategy means that no funds need to be set aside by the borrower to repay the mortgage. This means that someone wanting to extend their mortgage for, say, 5 years, on an interest only basis, which would be easily affordable, will be told by most lenders the mortgage is unaffordable because they asses it as a 5 year repayment mortgage!
Because most lenders ignore income from investments, just as they ignore the capital value of savings and investments, retired people with substantial investment, as opposed to pension, income are discriminated against.
This will progressively become an increasing problem with the changes in the pension rules from next April. With the current Mortgage Market Review (MMR) rules the new pension freedoms will make underwriting a mortgage application for many older borrowers more difficult. When most retired people relied on pension income it was relatively straightforward to assess their income, especially as such income was guaranteed for life, although allowance had to be made for any reduction in the survivor’s income after the first death.
In the new world retired people's income will increasingly come from a much wider variety of sources but the non pension income will be ignored by most lenders as it will be classed as investment income, including interest on savings such as ISAs.
Thus the level playing field which is opening up for retirees in terms of how to plan financially for their retirement will make it more difficult for some who want, and can afford, a mortgage post retirement to obtain one. Lenders could address this problem by widening their definition of income.
Many retired borrowers only need a low LTV and so qualify for a roll up lifetime mortgage. However, the fixed rates offered on these mortgages are generally in the 5.5% - 6.5% range, and although the fixed rate lasts for the term of the mortgage, this looks expensive when compared to the 3.49% fixed rate currently available on a conventional 10 year fixed rate, which is available up to 70% LTV.
One reason for the much higher rate is the cost of the no negative equity guarantee included with all lifetime mortgages that comply with The Equity Release Council guidelines. Important though this guarantee is when interest is being rolled up, it is an unnecessary cost for borrowers who are only taking a lifetime mortgage because they can’t obtain a standard mortgage and who plan to service their debt using the ERC free overpayment facility offered on some lifetime mortgages.
One might expect the FCA to encourage holistic advice, as indeed it does for investment advice, but for mortgages the MMR prevents it because lenders are required to assess mortgage applications on a very narrow basis, taking into account only income and expenditure and ignoring other assets such as savings and investments when assessing affordability.
Furthermore the MMR requires lenders to assess affordability for a low LTV mortgage, which is all most retired people need, on the same basis as a FTB wanting a 95% LTV mortgage, even if the retired person has significant assets.
As part of its current post MMR thematic review the FCA has an opportunity to reflect on whether preventing lenders from taking a holistic view when underwriting a mortgage is an unintended consequence of the MMR, particularly in the light of the significant impact the new pension and ISA rules are likely to have on how people both save for their retirement and generate income when they have retired.
Fortunately some of the smaller building societies will still lend to older borrowers who can demonstrate adequate affordability and so we have been able to help many older clients with a conventional remortgage. Some prefer to retain more of their income and so prefer a lifetime (equity release) mortgage, where the interest is rolled up.
Whilst this eats into the equity of their property this is not important for everyone and in any case with even modest house price appreciation he cash value of the equity will often be maintained. For example, with a 25% LTV mortgage at a lifetime fixed rate of 6% the property only needs to increase in value by an average of 1.5% p.a. for the cash value of the equity to be maintained.
The views expressed here are those of the author and do not necessarily represent or reflect the views of John Charcol Ltd
The blog postings on this site solely reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and neither Charcol Limited nor Ray Boulger will accept liability for them.