The report examines the impact of post-financial crisis mortgage regulation on the growing army of ‘non-standard’ customers who fall outside the traditional core of salaried borrowers with no credit blemishes who can pay off their loans before a set retirement date.
IMLA argues that people seeking a loan which is likely to remain outstanding beyond their normal retirement age are suffering from a lack of clarity in the Mortgage Market Review (MMR) rules, which is resulting in older borrowers being frozen out.
Most private sector employees now hold defined contribution (DC) pensions, which often prevent accurate predictions of their pension income – making it hard for lenders to determine how affordable a loan may prove beyond the point of retirement.
With the MMR requiring lenders to ensure mortgages are affordable for the lifetime of the loan in order to ‘protect borrowers from themselves’, the scope for interpretation has convinced many lenders that lending into retirement now carries extra risk if borrowers find at a later date that their retirement income disappoints.
In response, many mortgage lenders have imposed lower maximum age limits rather than risk future accusations of breaching the rules where customers’ pensions prove insufficient to keep up their mortgage repayments after they retire.
With house prices rising faster than incomes, many borrowers are not managing to purchase an appropriate family home until their forties or even fifties. But anyone over the age of 40 is seeking a loan with a standard term of 25 years will be borrowing beyond a normal retirement age of 65 and is liable to find their options restricted.
IMLA argues the upcoming thematic review of the MMR by the Financial Conduct Authority, which is set to examine responsible lending in the first half of 2015, must provide extra clarity so that lenders can offer the flexibility required to meet borrowers’ changing needs without fear of future censure.
Peter Williams, Executive Director of IMLA, comments:
“This issue goes beyond the transitional arrangements for existing borrowers, and means that efforts by the lending community to follow the spirit of MMR with new customers are being hampered by the very real concern that it may be cited against them in future.
Uncertain pension incomes make it difficult for lenders to assess mortgage affordability in later life, and this may become even harder when the new pension freedoms take effect next year. To avoid a situation where regulation brings about the extinction of mortgage terms that stretch into retirement, we need clarity and confirmation about where the boundaries of responsible lending truly lie.
MMR has been a big step forwards but having put a strong framework in place for the future, attention must now focus on honing the template so the pendulum doesn't swing too far towards conservatism. Wherever possible, protecting consumers from themselves should not rule out options that would benefit them financially and meet an obvious need.
Restricting access to mortgage credit is the right decision in some circumstances for the consumers' long term security, but equally there are situations when a refusal to lend can prove to be to the borrower’s financial detriment. We need to strike a balance and the FCA review will be vital so that an update to the MMR rules can iron out some of these creases.”
Affordability paradox hits asset-rich borrowers and financially responsible families
Although lenders have become more sensitive to borrowers with previous incidents of adverse credit – from missing a monthly phone payment to a serious loan default – the IMLA report argues that MMR has not greatly reduced the options for these consumers except where heavy adverse credit is involved.
However, it exposes a paradox where MMR’s emphasis on comparing income and expenditure creates problems for complex credit cases – including wealthier borrowers and financially responsible families – by disregarding their assets or net worth.
Individuals who may find their borrowing capacity unfairly restricted include those with substantial assets – such as a large equity investment paying modest or irregular dividends – who may not need to rely on a regular income to fund their lifestyle.
The prescriptive approach of MMR creates a broader problem because borrowers who have saved for specific expenses such as school fees cannot use those savings to offset the corresponding items of expenditure, as lenders are prevented from taking savings and other assets into account.
Smaller lenders could be increasingly relied on to support the self-employed
The report also singles out new difficulties in lending to the self-employed as a result of the enhanced income assessment requirements within the MMR.
Larger lenders that rely on automated loan underwriting are especially affected having lost the option to ‘fast-track’ self-employed borrowers with high credit scores, resulting in a more cumbersome process of manually checking accounts and financial statements.
As a result IMLA suggests that smaller lenders could be increasingly relied on to support the self-employed, as they use manual underwriting processes and can obtain a fair measure of income in the absence of a regular salary by better understanding borrower accounts.
Peter Williams, Executive Director of IMLA, comments:
“There is still a place for the majority of non-standard borrowers in the post-MMR mortgage market. An expanse of products remain on offer, backed up by expert broker advice which is increasingly vital to help consumers pick their way through the maze and find a product to fit their circumstances.
Nevertheless, there is the potential that MMR will have a long-term effect on the structure of the market, with large volume lenders increasingly focusing on the straightforward credit cases that are better suited to their streamlined systems while more complex cases – especially those with irregular incomes or needing loans into retirement – find a home with smaller lenders who specialise in understanding the complexities of such cases.
We must ensure that any divergence in the marketplace does not result in excessive pricing for non-standard borrowers and that access to a full range of products continues for this growing army of consumers."
