It is not up there with Einstein’s “Theory of Relativity”, but there is a property equation that is becoming increasingly puzzling and baffling!
We are all living longer, yet the “House Years” – the window in which we can obtain a run-of-the mill average mortgage – seem to be diminishing!
The average age for first-time buyer is now in the late thirties –while recent reports have highlighted the problems for those in their forties and fifties attempting to extend or get a new mortgage.
Lenders are blaming the tough regulations of the Mortgage Market Review (MMR) that was introduced officially by the Financial Conduct Authority (FCA) in April. The FCA is accusing the lenders of applying those regulations “too harshly”.
As ever, stuck in the middle, are you and I, trying to make sense of the confusion and seeking help from an Independent Financial Adviser (IFA) to find a way through this financial haze and maze.
Who’s to blame? Well, it certainly isn’t the borrower. Even in the crazy days of 110% mortgages, it was the lender that had lost the plot – and where was the regulator then?
It is clear that there are flaws with the MMR, not least because the FCA (the watchdog) has taken certain decisions that are causing problems; also, they have not made their intentions clear in some areas.
The first of the biggest two issues is the abandonment of interest-only mortgages for residential properties, even though many applicants have plans already in place to repay the loan at the end of the term, including the tax-free sum from a pension, or cashing in ISAs, shares, or insurance policies.
The other is not accepting the sale of the property as a means of repaying the loan. The logic of selling a house you have owned for 20-odd years when you are nearing retirement and want to downsize to clear your debt is rather obvious.
Also, borrowers trying to “port” a mortgage that was advertised as “portable” to a new property have found themselves subject to the new rigorous tests of “affordability” and all that entails, even when still in the initial fixed-rate period, when early repayment charges penalties apply.
Again, the FCA has insisted that lenders are being too strict with the new regulations and it was never the intention to penalise older borrowers. But it is happening and creating real problems.
At a recent conference hosted by the Council of Mortgage Lenders (CML), the FCA’s Linda Woodall explained: “There have been reports that older borrowers are finding it more difficult to get a mortgage and that this is partly down to our rules.
“But our rules do not aim to discourage lending to older consumers. Affordability is the key. In fact the income of older borrowers such as pension income can be very stable.”
Woodall added that the FCA wanted to avoid a “computer saying no’’ attitude to lending. “A sensible approach is all we are asking of you (CML).”
Mrs Woodall said that even home-owners wanting to downsize or reduce their debt have been refused. She knew of cases where customers had been turned down “on the grounds that the new loan is not affordable” even when the switch would mean lower monthly payments.
Small wonder that prospective borrowers are increasingly turning to IFAs to make sense of all these contradictions. Here again, there was a flaw in the MMR that omitted the word “independent” in its requirement to give customers “financial advice”.
If Nationwide or Santander is approached directly – and some lenders do not deal with IFAs – you will be given financial advice, but only on their own products, no one else’s. You will be recommended the best product available in that lender’s portfolio to your situation, hardly what was intended.
It seems rather crazy that the generation that is living longer, and working longer, and has serious wealth in terms of property, pensions and other investment assets in the UK, is being given the run a round by financial institutions and regulators that have performed so poorly and badly in recent years.
The FCA needs to act now and clarify exactly what “affordability” means. Perhaps, an income of £50,000 might reduce to around half that when someone retires, but if assets of £250,000 can be shown through savings, pensions, ISAS, shares, etc., then where is the risk, and problem.
What happened to “security” when taking out a loan? Will the lender be able to get his money back? That used to be paramount.
If a pensioner wants to be debt-free when he or she reaches 65 or 70 – that is their decision. That position should not be imposed on them, either by the regulator or by the lender.
If they have the assets and income, and would rather use some of the equity in their home to enjoy a better standard of living, that should be their choice.
Lenders are also using the new pension reforms that come into place next April as another reason for being over cautious. With the need to buy an annuity gone, that is viewed by them as a “minus” – rather than a “plus” and the fact that almost everyone will be better off and have more financial flexibility.
Lenders can “lighten up” – but they will need the FCA’s prompting.
The regulator must signal it will allow interest-only residential mortgages – if there are assets already in place to repay the loan – and that “selling the home” (especially when the owner has 50%-plus equity) is an accepted means of repaying the debt.
Finally, and most importantly, borrowers should be told to get “independent financial advice” when looking for a mortgage.
Ask factory work Matt Myles, 29, who won £1m on the Euro millions lottery in April.
After a £72,000 drinking spree, which included a lads’ trip to this summer’s World Cup in Brazil, £45,000 on a Porsche and £9,000 on an Omega watch, Mr Myles hit reality when he tried to get a mortgage. It was refused because of his poor credit rating and there was no regular income.
“I was going to buy a load of houses with mortgages and then get people in to rent them and pay for the mortgages,” he explained. “But the mortgage lenders didn’t see the investment as income, so, in effect I am a millionaire, but I can’t get a mortgage.”
There are many others who feel exactly the same way!
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