BSA: Lenders must change stance on lending into retirement

Stress-retirement-income-savings-pension

The Building Societies Association says lenders must change their attitudes to lending into retirement after research revealed half of 25-34 year olds believe they will not pay off their mortgage while working.

Over a quarter (27 per cent) of the 2,000 people surveyed by the BSA also think they may struggle to get a mortgage into retirement because their credit history, income level or age will count against them.

Many commentators argue lenders have tightened up on their lending into retirement criteria as a result of the Mortgage Market Review.

The issue was brought to the fore recently when the Financial Ombudsman Service upheld a complaint against HSBC for unfairly rejecting a mortgage application on the grounds of age. This was the first case of its kind.

BSA head of mortgage policy Paul Broadhead says lenders need to relax their criteria around lending into retirement.

He says: “Many younger buyers are realising that they may not be able to pay off their mortgage until after they retire. As the average age of a first-time buyer increases, borrowing into retirement is becoming the ‘new normal’, rather than a niche form of lending.

“The Mortgage Market Review, introduced just over a year ago, has had an impact on borrowing. The application process is much more rigorous and borrowers now have to contend with strict affordability assessments that factor in other commitments. This means they may have to borrow over a longer term to secure a mortgage.

“These demographic and regulatory changes mean some borrowers may find their mortgage application is rejected if they need to borrow into their anticipated retirement. The mortgage market needs to change to cater for this shift in borrowing.”

In the HSBC case, a couple in their forties, referred to as Mr A and Ms B, were turned down when applying for a joint £250,000 interest-only loan over an 18-year term.

HSBC rejected the application on the basis that Mr A would have been over 65 when the loan had to be repaid. It said it was entitled to apply a maximum age policy and that it did so to mitigate the reputational risk of allowing customers to borrow into retirement.

But the FOS said the couple’s joint income would have been sufficient to meet the monthly repayments after Mr A reached 65. It added his professional circumstances meant he was unlikely to retire at that age and, in any case, he had a final salary pension scheme.

The FOS accused HSBC of having carried out a “flawed” and “inadequate” risk assessment. It ordered HSBC to pay the couple £500 for distress. It initially proposed that HSBC reconsider their mortgage application but has since redacted that as HSBC has significantly changed its interest-only lending policy since the couple made their application in 2012.