Mortgage lenders’ “ridiculous” approaches to pension contributions post-MMR are driving advisers to consider the controversial step of telling borrowers to opt out of their pensions.
Following stricter affordability tests introduced under the MMR in April, some lenders take pension contributions into account when assessing affordability whereas others do not.
Brokers say the stance of some lenders unfairly penalises more prudent borrowers, and is pushing them to consider advising borrowers to temporarily stop their pension contributions before applying for a mortgage.
But experts warn such advice would be “dangerous” and risks breaking regulatory rules.
John Charcol senior technical manager Ray Boulger says: “Some lenders take into account defined contribution pensions, and some even take account of personal pension contributions.
“These are clearly not committed expenditure as they could be stopped at any time. We are in the ridiculous situation where the right advice might be to stop making regular contributions before applying for the mortgage, and either start again after being approved, or switch from regular to ad hoc contributions so they are not taken into account.”
London & Country associate director of communications David Hollingworth says: “If you have two otherwise identical clients, and borrower A is putting money aside for their retirement and borrower B is not, we are reaching a point where borrower B will be lent more money and that does not feel right.
“Pensions are part of saving, and for a lender to prefer someone who does not save is ridiculous.”
But he warns it would be “dangerous” to advise borrowers to stop making pension contributions.
Some experts suggest brokers could be making serious regulatory breaches if they were to advise borrowers to cease pension contributions.
Wingate Financial Planning director Alistair Cunningham says: “A lot of mortgage advisers are not authorised to give advice on pensions so how can they give advice to opt out of a pension scheme which, even if only for three months, would require special permissions?
“It is understandable that consumers would consider this if it was the only way they could get a mortgage, but it feels deceptive because if they go back to making contributions they have potentially borrowed more than they can afford.”
Chase de Vere head of communications Patrick Connolly says: “If borrowers take a break from their pension contributions, then why not take a break from their TV subscription and other costs and pretend they have more disposable income than they do?
“The problem then becomes that if you restart those payments, you may not be able to afford your mortgage.”
Consulting Consortium head of policy Rebecca Prestage says: “Advisers should think very carefully before advising people to stop pension contributions in order to get into debt. There is even a suggestion of whether it would constitute mortgage fraud if you are manipulating a borrower’s income.”
Hollingworth says lenders should reconsider their approaches to ensure pension saving and mortgage borrowing are not incompatible.
He says: “The biggest issue is lenders taking different approaches, which means that as a broker you have to narrow the field of lenders for borrowers who pay into a pension.
“Brokers should not be telling borrowers to cease pension contributions but if this is where the MMR is driving people, then lenders should look again at their policies.
“There can be sensible reasons why a lender would take pension contributions into account, for instance, if a consumer was borrowing into retirement.
“The fact that some lenders are flexible shows there are sensible ways of looking at this.”
How do lenders approach pensions contributions?
Barclays: Takes pension contributions into account when assessing affordability, including additional payments on top of regular monthly contributions.
HSBC: Takes pension contributions into account, including additional payments on top of regular monthly contributions.
Coventry Building Society: Takes regular pension contributions into account.
Royal Bank of Scotland/NatWest Intermediary Solutions: Does not take pension contributions into account.
Nationwide: Assumes a certain contribution level for all applicants, so customers saving into a pension are not disadvantaged.
Lloyds Banking Group: Does not factor pension contributions into affordability tests.
Santander: Did not respond to a request for its policy from Money Marketing.