Lending into retirement

With signs that the FSA is to focus on advised mortgages going over into retirement


These days, people are carrying ever larger debts later into life. It is now increasingly common to see new mortgages arranged with terms that stretch beyond borrowers' planned retirement ages.

On the face of it, this is an alarming trend, so it is not surprising that the FSA recently investigated how lenders meet their obligation to assess borrowers' ability to afford the mortgage beyond their retirement. The FSA reported some examples of good practice from lenders who evidently take this obligation very seriously. For example, some lenders' application systems automatically ask for additional affordability details, whenever the requested term goes beyond normal retirement age.


But the FSA's findings also highlighted some poor practice examples. These include making no attempt to assess affordability during underwriting – and then adding clauses to offer letters, warning clients they should be happy that they will be able to cope with payments after they retire; not considering affordability unless clients are due to retire in less than five years – on the grounds they will probably have remortgaged to another lender by the time they retire; and relying on brokers to vouch that clients will be able to afford the mortgage after retirement – without bothering to ask them what criteria they use to reach this conclusion.

So what issues does this raise for mortgage intermediaries and why does it matter? For a start, lenders can be expected to take a closer interest in post-retirement affordability, now the FSA has made its expectations clear. It is also highly likely the FSA will soon get around to looking at whether advisers are carrying out proper assessments on the affordability of mortgages that carry on past retirement age.

Mortgage advisers are not expected to carry a crystal ball around when assessing affordability. But advisers do have a duty to consider future events that they should be aware of at the time they give their advice, and this will impact on a client's ability to repay. An obvious example is when the adviser knows the borrower is due to retire halfway through the mortgage term. Common sense dictates income is likely to fall significantly at that point.

In practice, assessing affordability beyond retirement is often impossible in any meaningful way. In some cases it is possible to predict roughly how much income clients will have in retirement, such as people who have been members of public sector final salary pension schemes all their working lives, and who are only a few years away from retiring. But, in most cases, mortgage advisers will not have any real idea what their client's post-retirement income will be. In this situation, advisers really should not be recommending a term that goes beyond that point.


Kinetic is seeing more interest-only mortgages being taken out by people who have already retired – for example, to fund ­purchases of holiday homes. Odd as it may seem, these cases are often safer for advisers than those involving people who are currently working, but who are due to retire during the term. If clients have already retired, their retirement income is a known fact, so the adviser can carry out an affordability assessment in the normal way. For clients with a good retirement income, but who need to raise capital, an interest-only mortgage can be a viable, and cheaper, alternative to equity release products.

The message is simple. Advisers should ensure that they are looking after their clients' interests, and their own, by fully documenting any advice, particularly when it relates to sensitive issues such as mortgages running into retirement.

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