Guest blog: Nearing retirement with an outstanding mortgage. It may not be as simple as telling borrowers “pay down your debt”.

2nd May 2014

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Paul Smee, director general of the Council of Mortgage Lenders says the pension reforms pose many questions for lenders, the planned pension guidance and thus for those with outstanding mortgages but also some pension investments as they near retirement.

“I am 100% behind the Government’s reform of annuities; it’s the second 100% of their proposals I am not so sure of”.

Certainly the Budget announcement is one of those rare occasions which justify the clichéd headline “Budget Bombshell”. No-one really saw it coming and its impact is going to ripple through the financial services sector and beyond. And mortgages are not immune. After a delightful half hour when I fondly imagined that the Budget was someone else’s problem, it dawned on me that there is going to be a lot for Council Mortgage Lenders to work through.

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Start with the advice process; we know that every retiree will be offered a short free advice session on the options for their pension pot (actually it will be a “guidance session” in so far as the regulatory regime is concerned but most participants will feel “advised”). Apparently this will last fifteen minutes (a sort of Andy Warhol approach to advice?). How will the time be filled? Certainly questions need to be asked about the existence of debt including mortgage debt. But this is not going to be the occasion for detailed counselling on how to handle it.

I would be extremely worried if I thought that mantras about “paying down your debt” would be dispensed with little time for follow-up or detailed discussion. Many in this position will have interest-only mortgages, some of which will require a repayment vehicle. There should be no assumption that a pension pot can be that vehicle, even if in certain circumstances it might be appropriate. I want to know how debt issues will be covered in this conversation and what the hand-offs will be – as surely the main outcome of this preliminary conversation will be a series of further conversations. Lenders should be an early point of call where there are outstanding interest-only mortgages.

Go on to the regulatory process. Lending into retirement is one of those clunky bits of the new regulatory regime where no-one says that it is forbidden, the rules don’t quite work for it and  everyone is acutely concerned with the consequences of getting it wrong. We need a new look (or perhaps even a new product) in the light of a new pensions regime. If pension pots do not have to be taken as annuities, what view will lenders take on the ability of borrowers to service loans beyond retirement (whatever that means now)?

End on market structure. What happens to the relationship between the equity release market and the residential mortgage market? The two have been seen as in largely separate compartments, partly driven by separate regulatory regimes. Is this going to change with changes to pension structure? Are there going to have to be better bridges built between the two markets so that those in retirement can segue between them without a grinding of gears? Or is this an opportunity for a new market to develop that serves the 55-70 age group in a different way?

Final coda: let’s not get carried away with speculation about all this cash going into buy to let. We need to consider the reading of risk; with the average size of a pension pot at well below £30k, there is no easy one-stop investment answer. Let’s not pretend that there may be.

And to focus minds: all this is being done against an April 2015 deadline. These are big questions for the mortgage market, let alone the pensions market. But it is an opportunity to help customers make better decisions for their later life that should not be missed.  So even if a limited solution has to be built in order to meet the 2015 deadline it should be a beginning not an end.  And the clock ticks on.

 

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