In April next year pension holders will no longer be required to purchase an annuity with their savings giving them the freedom to invest their nest egg in a variety of ways.
Despite section 11.6.9 (1) of the Mortgage Market Review (MMR) stating that income may be derived from sources other than employment (such as pensions or investments) most lenders will currently only allow earned income or pension income to be used to assess the borrower’s affordability.
Ray Boulger, senior technical director at John Charcol (pictured), said: “With the current MMR rules the new pension freedoms will make underwriting a mortgage application from older borrowers much more difficult.
“When most retired people relied on pension income, including annuities, it was relatively straightforward to assess their income, especially as such income was much more secure than earned income as it was guaranteed for life.
“Although allowance had to be made for any reduction in a couple’s income on the first death.
“In the new world, with ISAs also being liberated as well as pensions, we will increasingly see retired people’s income coming from a much wider variety of sources. In particular it is highly probable that more of this income will be investment income, including interest on savings such as ISAs.”
Boulger said the options opening up for retirees planning 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,” he added.
Mortgage Solutions asked Paul Smee, director general of the Council of Mortgage Lenders, in an exclusive interview at its annual conference, for his thoughts on income criteria for retired borrowers.
He said: “We are saying to the FCA that its retirement rules need to be looked at again in light of the changes in the annuity markets. It is something people are very cautious about but the regulator needs to have a root and branch look at the way it treats retirement in the new circumstances. I believe this is so fundamental a shift that I just can’t see the regulator ignoring this.”
Meanwhile, Boulger accused the FCA of being part of the problem and effectively holding lenders back from helping older borrowers.
“[…]the MMR requires lenders to assess affordability for a retired person, or someone who wants a mortgage beyond the date a lender assumes they will retire, and who wants a low loan-to-value (LTV) mortgage, but has significant assets, on the same basis as a first-time buyer wanting a 95% LTV mortgage. The first-time buyer will have no significant savings left after funding their deposit.
“Regulators should consider which of these two types of borrower they would prefer to lend their own money to,” said Boulger.