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'Baffling' rules leave over-40s stuck with bad loans
Homeowners over 40 face a form of age discrimination as mortgage lenders fail to acknowledge that people are working for longer.
by Michelle McGagh on Feb 25, 2016 at 09:00
Homeowners over 40 are being left to languish on poor mortgage deals as lenders fail to keep up with the trend for longer working lives.
Despite an increasing number of people getting on the property ladder later in life and / or working beyond the standard retirement age of 65, securing a mortgage in your 40s is still a struggle.
The Council of Mortgage Lenders said a third of new mortgages extend beyond age 65 and more than half of borrowers take out a mortgage term of more than 25 years.
However, lending in retirement has declined since 2007, with the value of mortgages taken out by borrowers aged over 65 down to around £1 billion in 2014, accounting for just 0.5% of total advances.
According to Nottingham building society, 17% of mortgage and remortgage customers have been turned down for a loan because of their age and the figure rises to 21% for those aged 45 to 54.
Ian Gibson of The Nottingham building society said it was ‘baffling for people in their early 40s to be told they are too old to have a mortgage and particularly so when the average age of first-time buyers is rising which means some could even be first-time buyers’.
The problems for middle-aged borrowers securing loans have intensified since the City regulator, the Financial Conduct Authority (FCA), implemented its ‘mortgage market review’, which toughened up affordability criteria.
Sue Lewis of the Financial Services Consumer Panel, which sits within the regulator, said while mortgage lenders would like to change the age limits they have imposed, it was not happening quickly enough.
‘The FCA’s mortgage market review has resulted in providers applying stricter affordability criteria for mortgages, with most setting a maximum age limit on mortgage deals,’ she said.
‘There is some evidence that the mortgage industry is reconsidering this, but it needs to happen faster as many people are stuck in a poor deal and unable to switch to a new provider based on a factor they are unable to change.’
Lewis said the restrictions amounted to discrimination against older borrowers.
‘Older people are likely to find themselves victims of age discrimination,’ she said. ‘This is not permitted in most service industries, but financial services are exempt. Firms can use age as a risk factor in pricing financial products, or even refuse to provide products to certain age groups.’
Lewis pointed to the problems older people face in obtaining travel and car insurance at a reasonable price.
Building societies have said they will review the maximum age for lending but this could lead to profound changes in the way mortgages are granted.
Paul Broadhead of the Building Societies Association said: ‘The last thing we want is for credit-worthy customers to be locked out of the mortgage market on account of their age. That is why every building society has committed to review its maximum age policy.'
He added: ‘Some policies might stay the same, some might move up and some might go altogether. Of course, that depends on any particular lender’s expertise, risk appetite, systems, processes, and knowledge of the market.’
Scrapping age restrictions means traditional mortgages and lifetime mortgages, which are a type of equity release scheme, would overlap.
Lifetime mortgages are a long-term loan secured against a property and the homeowner does not have to make any payments in their lifetime and the loan is repaid from the estate on their death.
Broadhead said it could ‘blur the boundaries’ between the different mortgages.
‘That is a fair challenge, if a mortgage term extends beyond a borrower’s expected lifespan then implicitly it is expected that the capital will be recovered from the borrower’s estate,’ he said. ‘With a traditional mortgage the lender, and the regulator, expects the capital to be paid back at the end of the term.’
He added that borrowers for traditional mortgages could be made to go through the same process that lifetime mortgage borrowers go through, which in some cases involves consulting family members who would otherwise inherit the estate.
Last year's pension freedom reforms have had some impact on the way lenders look at older borrowers. Previously, retirees used their pension pots to buy an annuity to provide a regular income for the rest of their lives. Now they can keep the money invested and withdraw lump sums when necessary, although they run the risk of running out of cash before they die.
June Deasy of the Council of Mortgage Lenders said it would take some time before the impact of pension freedom was known but it was clear the end to compulsory annuitisation would influence borrowing behaviour later in life.
‘The centrality of pension income to overall financial well-being in later life has been overtaken by events,’ she said, adding that CML would monitor ‘the interaction between pension freedoms and the mortgage market – including the ways in which pension pots are being used for mortgage payment purposes’.
Affordability calculations currently look at current fund valuations of defined benefit and defined contribution pensions; retirement age; the value of the pension at retirement taking into account inflation; and consideration of loss of income if a joint borrower dies.
‘When borrowing in retirement, the customer is likely to be drawing from an existing pension and this will be affected since April 2015 by the customer’s choice of annuitisation, drawdown or cash,’ said Deasy.
‘The traditional timing of when to offer products or services for the about-to-retire has altered and become more complex. The end of term is no longer invariably 65.’
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