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Mortgage lenders stand firm on controversial pensions stance

Mortgage lenders are standing by their stance on pension contributions despite a warning from pensions minister Steve Webb that he is “deeply concerned” by the practice.

Last week, Webb wrote to the Council of Mortgage Lenders and the Association of Mortgage Intermediaries after Money Marketing reported some lenders take pension contributions into account when assessing affordability while others do not.

Brokers had warned the practice unfairly penalised more prudent borrowers and could cause intermediaries to take the controversial step of advising borrowers to opt out of their pension schemes.

In a letter to CML director general Paul Smee, Webb said: “It appears utterly counter-intuitive for a person who demonstrates financial prudence by saving for a pension to be penalised in the mortgage market.

“I would welcome any reassurance you might be able to provide that, in future, responsible borrowers who choose to save into a pension scheme will not be penalised.”

But despite the warning, all four of the major lenders which told Money Marketing they take pension contributions into account say they have no plans to change their stance.

Barclays, Coventry Building Society, HSBC and Santander will continue to deduct pension contributions in affordability assessments.

A spokeswoman for Santander says: “We take into consideration all deductions including pensions although schemes such as Sharesave can be ignored if the customer says they would cancel in the event of a problem. But pensions are a fixed outgoing which you cannot cancel.”

But amid a growing row between pension advisers, mortgage brokers and lenders, many argue a borrower can and probably would cancel their pension if they got into financial difficulties.

There are also increasing concerns among pension advisers that brokers are giving “immoral” advice that threatens to undermine the progress of auto-enrolment.

One pensions adviser, who did not want to be named, says: “I have seen several clients who have been advised to opt out of their pensions and it is outrageous.

“These are people who have been auto-enrolled and I cannot think of a worse piece of advice. Borrowers may say they will opt back in [later] but in reality they will not.

“Legally, mortgage brokers should not be giving advice on pensions and, secondly, it is totally immoral. We have two pieces of legislation – auto-enrolment and the MMR –which are totally at odds.”

Plan Money director Peter Chadborn says: “There is a danger where an adviser is providing focused advice without considering other aspects of the client’s affairs. If a mortgage broker is telling a borrower to cancel a pension or anything else, such as a protection policy, they need to fully explain what the long-term consequences of that will be.”

But mortgage brokers say they have a duty to get the best deal for their clients and there is nothing wrong in telling borrowers to temporarily stop pension payments.

Highclere Financial Services partner Alan Lakey says: “If a borrower comes to me to gauge how much they can borrow, I will say ‘Your pension has cost you £6,000 of borrowing; how important is that to you?’ If the £6,000 is really important, I will say “You should opt out of your pension scheme and go back in at a later date.

“It is not wrong of me to do that. What is wrong is for lenders to not recognise that pensions are optional.”

Lakey has regulatory permission to give pensions advice but says that even if he did not, the borrower could deduce for themselves the impact opting out of a pension would have on their mortgage borrowing.

He says: “Anyone with half a brain and the ability to do this without breaching any regulatory rules would do it.

“My job is to do everything I can to get my customers the best mortgage deal. And in the same way I would advise someone to pay off a credit card before applying for a mortgage, I would also inform them of the impact of changing their pension contributions on the amount they can borrow.”

GDC Associates partner Derek Gair adds: “If the client wants a mortgage, you have to do what you have to do. The client will make up their own mind up about what to cancel. 

“The situation has been created through a combination of lenders’ inflexible policies and the MMR rules being too open to interpretation.”

A spokesman for the Department for Work & Pensions says Webb is awaiting a response from the CML and Ami before taking any further action. The spokesman says: “Part of the purpose of writing these letters is to try to find out how much of an issue this is.

“If it is the case that brokers are encouraging people to opt out of workplace pensions, there is very much a risk of this undermining the Government’s efforts to encourage as many people as possible to stay in their auto-enrolled pensions.

“What is not clear at this stage is how widespread the problem is.”

Some lenders argue they must take pensions into account because to do otherwise risks consumers borrowing more than they can afford.

Nationwide, however, assumes a certain contribution level for all applicants so those paying into a pension are not disadvantaged. NatWest Intermediary Solutions and Lloyds Banking Group do not take pension contributions into account. 

The DWP spokesman says: “Clearly there are some lenders which have managed to find a way through this – by assuming a certain contribution level for all applicants or not factoring in pension contributions at all.

“This would appear to be a much fairer and less dangerous approach than one which, even if unintentionally, provides an incentive to people to stop saving for a pension.”

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Comments

There are 12 comments at the moment, we would love to hear your opinion too.

  1. Those mortgage providers who take into account pension contributions are actually right. There’s no point in pretending the client can afford £800 per month, say, if in reality £100 of that is going into pension savings. It would not be prudent and would mean their home is at risk in the rather likely event of interest rate rises. The mortgage market would become very unstable and it is not the job of mortgage providers to ensure that auto-enrolment works.
    Of course that doesn’t mean that people should necessarily opt-out of their pension. One needs a pension and one needs a home. It’s just that pension-saving means that one has can only afford a cheaper home than you previously expected.

  2. @Tom Murray

    Perfectly put. In today’s world many believe they can have everything – that’s why we have such a huge debt pile. Money management never seems to be on the agenda.

  3. Rt Hon Sir Arthur Streeb-Greebling 10th November 2014 at 2:53 pm

    Yet another reason why the self-employed or directors of close companies should’t buy pensions. You don’t get ‘tax relief’ on a pension; you get tax deferral. The resulting ‘pension’ is visible to HMRC and now, lenders.If someone running their own business can’t think of better ways of profit extraction (than pension contributions) they ought to get a good qualifies tax practitioner on their case.

  4. @Tom Murray

    How can you make such a generalised statement. Each lender treats the same level of payment differently in how it affects how much they will lend. Each clients situation is different and many would be better off finacially not paying protection and pension premiums because of the interest rate that is used to calculate their monthly payment . Just as they would be better off being allowed to select the mortgage term they want, rather than being forced to extend their mortgage term and pay more interest in the name of affordability.

    It is an undeniable fact that a client who pays an interest rate of 2% will have more disposable income than one who pays 4% or in Santanders case 4.79% as a mortgage prisoner.

    The problem with this, as with most of MMR is that it has just changed where lenders have aligned their tick box mentality, not made them more responsible. The result is many more people are being forced to pay more than they should each month and in truth are really helping to pay the fines levied at these very same lenders by the FCA.

  5. @Steven Pearman It’s up to each mortgage lender how they treat the information given and how they assess affordability. Perhaps I phrased it poorly but what I was objecting to is the idea that the Pensions Minister was trying to stop lenders taking it into account, in order to prevent anyone opting out in order to get a mortgage. It should be up to the provider to decide on how they assess affordability and the adviser to advise whether the client should keep paying pensions and borrow less or whether their financial interest is best served by opt-ing out and borrowing more.

    I myself would err on the side of caution and take the pension’s contributions into account as it is a financial commitment. The logical corollary of that is that if an individual want’s to borrow more, they would have to stop their pension contributions, which may well be the correct thing to do, although the Minister seems firmly against this on principle, as it undermines his key policy.

    Forcing lenders not to take pension contributions into account would surely give a blanket lift to the levels of affordability, meaning that some borrowers would have too little contingency in managing their money.

  6. “could cause intermediaries to take the controversial step of advising borrowers to opt out of their pension schemes”

    How about advising them to buy a smaller house and remain able to provide for their retirement instead?

    “Mortgage lenders are standing by their stance that spending on children’s food and clothing should be included in borrowers’ outgoings, despite warnings from brokers that the practice could cause intermediaries to take the controversial step of advising borrowers to abandon their children in the woods.”

  7. Even if you have permission to advise on pensions (which a large number of mortgage intermediaries don’t just as a large numbers of pension advisers don’t have mortgage permissions), pension transfers and OPT OUTS require AF2 or it’s predecessor G60, PLUS the relevant permissions for the firm twith the FCA. If someone advises to “Opt out” without the relevant permissions whether in writing or accidentally verbally (as it is very easy to record what an adviser says as an MP3 file on your phone), then they are in BIG trouble.
    Discussing priorities of budget however with a client for THEM to choose what they want to prioritise (even if it is contrary to what the adviser recommends, i.e. PIMPSIO order) is not advising, nor is it a regulated activity.
    I do however have no intention of discussing whether feeding the kids or abandoning them in the woods 🙂

  8. So a higher rate taxpayer makes a £40,000 pension contribution which is entirely discretionary and gets 40% tax relief on the contribution e.g. £16,000.

    Even if that client had no growth on the funds whatsoever under new flexible drawdown rules after April that client can draw that money out entirely and still be 10% up even if you remain a high rate tax payer.

    £40,000 gross x 40% = £16,000 tax relief

    £40,000 x 25% = £10,000 @ £30,000 x 40% = £12,000 net return £28,000

    The difference is £4,000 and that’s without any growth, which I forgot is also tax-free.

    It may be taxed deferral still works for me!

    Just proves to me that the people working within mortgage companies don’t have an awful lot of brains.

    What we need in the mortgage market and pension market however is stability e.g. one set of rules that don’t change for a long time.

  9. @Steven Pearman It’s up to each mortgage lender how they treat the information given and how they assess affordability. Perhaps I phrased it poorly but what I was objecting to is the idea that the Pensions Minister was trying to stop lenders taking it into account, in order to prevent anyone opting out in order to get a mortgage. It should be up to the provider to decide on how they assess affordability and the adviser to advise whether the client should keep paying pensions and borrow less or whether their financial interest is best served by opt-ing out and borrowing more.

    I myself would err on the side of caution and take the pension’s contributions into account as it is a financial commitment. The logical corollary of that is that if an individual want’s to borrow more, they would have to stop their pension contributions, which may well be the correct thing to do, although the Minister seems firmly against this on principle, as it undermines his key policy.

    Forcing lenders not to take pension contributions into account would surely give a blanket lift to the levels of affordability, meaning that some borrowers would have too little contingency in managing their money.

  10. Having recently experinaced the new MMR affordabilty rules and process I feel what is lacking is a common sense by the lenders.

    This has lead me to ask a few questions

    What is afforablity and what bench mark and standards are they using. Is affordability based on this years Gross Income and Expenditure ,Lenders are quite use to asking for cashflow to measure their lending risk why not access the risk using a personal cashflow planning which can if required .factor mortgage rate rises.

    I cannot understand why they can not take out of the equation pension repayments. That would be quite easy to quantify vast majority of the population as many have their contribution deducted at source and payslips show the net contribution after that deduction .Therefore test can be based on net income rther than gross income.

    The exception is the self-employed and owner managed Directors majority of cases pension contributions decided on profitability of the business. and if contributions are paid they are done so on behalf the owner by the their company as a allowable business expense.

  11. @Tom Murray

    How can you make such a generalised statement. Each lender treats the same level of payment differently in how it affects how much they will lend. Each clients situation is different and many would be better off finacially not paying protection and pension premiums because of the interest rate that is used to calculate their monthly payment . Just as they would be better off being allowed to select the mortgage term they want, rather than being forced to extend their mortgage term and pay more interest in the name of affordability.

    It is an undeniable fact that a client who pays an interest rate of 2% will have more disposable income than one who pays 4% or in Santanders case 4.79% as a mortgage prisoner.

    The problem with this, as with most of MMR is that it has just changed where lenders have aligned their tick box mentality, not made them more responsible. The result is many more people are being forced to pay more than they should each month and in truth are really helping to pay the fines levied at these very same lenders by the FCA.

  12. @Steven Pearman It’s up to each mortgage lender how they treat the information given and how they assess affordability. Perhaps I phrased it poorly but what I was objecting to is the idea that the Pensions Minister was trying to stop lenders taking it into account, in order to prevent anyone opting out in order to get a mortgage. It should be up to the provider to decide on how they assess affordability and the adviser to advise whether the client should keep paying pensions and borrow less or whether their financial interest is best served by opt-ing out and borrowing more.

    I myself would err on the side of caution and take the pension’s contributions into account as it is a financial commitment. The logical corollary of that is that if an individual want’s to borrow more, they would have to stop their pension contributions, which may well be the correct thing to do, although the Minister seems firmly against this on principle, as it undermines his key policy.

    Forcing lenders not to take pension contributions into account would surely give a blanket lift to the levels of affordability, meaning that some borrowers would have too little contingency in managing their money.

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