There are two elements to this: one is that it may well cause resurgence in interest-only mortgages; two is the affect that it may have on the buy-to-let sector at the point that people retire.
Taking each element individually, I expect to see some significant product developments from lenders with regards to the pension rules. The possible development of a pension mortgage, for example could swing the market back in favour of interest only mortgages again if it becomes an option for someone to use their pension as a viable repayment vehicle.
This could have an additional effect on how much people pay into their pensions and how quickly someone pays off their mortgage compared to how much they save in their pension. People do not currently maximise what they are paying into their pension, as they cannot, under present rules, get their hands on all of their pension pot and usually end up buying an annuity.
Once people can take all of their money as a lump sum and do with it what they will, it may make more sense for them to save the maximum they can afford into a pension where it will receive tax relief at their highest rate.
In time this may well shift someone’s focus so they pay the minimum off their mortgage, let inflation erode the value of the capital owing and then take their tax-free lump sum to pay off their mortgage and place in future investments. Of course the validity of this strategy does depend on a client’s tax status and also the performance of the pension.
Future investments, brings me on to the second point. If people no longer have to buy an annuity, then there may be a temptation to tame control of their own investments and consider either entering the buy-to-let market, or adding to a current portfolio instead?
They could feasibly use the pension pot to put down deposits on two or three buy-to-let and live off the rental income as a pension.
I expect to see a lot more product innovation in this area, with mortgage products developed well into retirement.
Equity release recorded its highest first quarter since records began, expect to see some new product launches aimed specifically in this market in the years to come.
David Copland is director of LSL mortgage services
