The FCA says it is discretionary spend and some lenders agree, while others consider that if you’ve paid the same amount for multiple years this is committed expenditure. So exactly what is essential spend?
This is a challenging area as what is considered as an essential expense and what’s discretionary alters from person to person. To an extent someone’s food bill has a level of discretion in it, if someone shops in a premium supermarket every week, they could no doubt lower their food bill by shopping in one of the continental ‘budget’ supermarkets instead – or buying less food. Some people would consider school fees an expenditure that they would waive if they hit hard times while others would consider them sacrosanct. The fact is that what is considered essential differs according to every person.
The pensions one is a fine balance; it is in the best interest for the community as a whole for everyone to have the best pension that they can afford. The advent of the auto-enrolment scheme this year illustrates what importance the government puts on increasing the level of pension savings, however surely there needs to be a level of common sense here? While auto enrolment amounts are obligatory, other people choose to top up their pension every month by a higher amount. It is this amount that could be considered discretionary by lenders.
The same applies to life assurance and critical illness payments. Most of the adviser community are committed to ensuring that their clients have the protection they need, but should someone be penalised in the mortgage stakes for this sensible decision?
Maybe one solution would be get a client to sign a document or waiver stating the amount that they would reduce their pension or life assurance by if they encountered a time when they couldn’t pay their mortgage. That way everyone would be assured that the whole pension would not need to be paused but it would enable someone to get the mortgage they need while also taking a sensible approach to their pension payments.
The more controversial alternative is that if somebody’s affordability is borderline that they purchase mortgage payment protection insurance at the time they take out the mortgage. As long as the policy is comprehensive it would pay out in the case of redundancy or illness and so should provide the lender with an element of reassurance.
No policy will cover every event, but there must be a level of commonsense here that most people, when faced with losing their house if they don’t pay their mortgage, would cut back on everything they can in order to keep their roof over their head.
Toni Smith is sales operations director at First Complete
