Mortgages running into retirement

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1 Financial Services Authority Mortgages running into retirement Examples of good and poor practice for mortgage lenders Note: This paper discusses the responsible lending policies of mortgage lenders. It does not address the affordable lending responsibilities of mortgage intermediaries. July 2007

2 Summary This report reviews whether mortgage lenders have appropriate policies in place to comply with our responsible lending rules, when granting mortgages with terms running beyond expected retirement of the borrower. We reviewed the policies of 22 UK mortgage lenders, in both the prime and sub prime markets, to discover how they took account of the customers ability to pay after retirement. We found both good and poor practices. We are reporting these here to help senior management decide what the responsible lending rules mean for their firm. The poor practices we identify are likely to get in the way of firms complying with our requirements. The good practice is reported to give examples of ways firms are meeting the requirements. In other firms this may not be sufficient or, on the other hand, it may go beyond what we would expect depending on the particular circumstances of the firm. What we want mortgage lenders to do Read the good and poor practices in this report. Consider whether their firm s affordable lending policy complies with our rules. If not, make appropriate changes. Financial Services Authority 1

3 Regulatory outcomes This guide aims to help mortgage lenders to comply with our responsible lending rules and so with Principle 6 a firm must pay due regard to the interests of its customers and treat them fairly. Our responsible lending rules require a lender to consider customers ability to repay throughout the mortgage term, before granting a mortgage. We would also expect compliance with the responsible lending and disclosure rules, to alert customers to the need to consider how they will continue to afford repayment in retirement. 2 Mortgages running into retirement (July 2007)

4 Good practice One lender s underwriting system (used by intermediaries to submit mortgage requests to them) automatically triggered a request for additional information on affordability in retirement if the term reached beyond normal retirement. Without this, the application could not be submitted. Several lenders included upper age limits they would accept for different types of employment. They used these to help assess the reasonableness of customers claims that they would extend their working life to afford a loan beyond normal retirement date. Several lenders asked when the customer expected to retire during the underwriting process. They used this to assess affordability in retirement, rather than making assumptions. Two lenders (both of whom mostly advanced re-mortgages for debt consolidation) phoned all customers before granting a loan extending beyond retirement. During this phone call they confirmed that customers understood the key features of the loan, including the fact that it ran into retirement, and checked details used to assess affordability. 3 Mortgages running into retirement (July 2007) Financial Services Authority 3

5 Poor practice Several lenders relied on assertions by intermediaries that they had considered affordability in retirement, without assessing what criteria the intermediaries were applying in making this judgement. Although lenders may rely on information from others, they must be able to demonstrate that it is reasonable to do so. Several lenders did not consider affordability in retirement unless the mortgage ran more than a specified number of years beyond that point. One lender did not consider affordability in retirement unless the customer was within five years of retiring, since they expected most borrowers to remortgage within that time period. Several lenders included clauses within the offer documents stating that the customer should be satisfied they would be able to continue to meet repayments in retirement, but made no attempt to assess affordability themselves. 4 Mortgages running into retirement (July 2007)

6 An explanation of our lending rules Our lending rules say that a firm must put in place, and operate in accordance with, a written policy setting out the factors it will take into account in assessing a customer s ability to repay (MCOB R). So mortgage lenders should assess the customer s ability to repay; they cannot rely on non-specific assessments or assurances whether made by the customer or others such as intermediaries. The factors used by the mortgage lender must be formally documented in a written policy (MCOB11.3.4R). This ability to pay should include the customer s actual or reasonably anticipated income and the level of both initial and subsequent repayments (MCOB R(1) and (2)). So, mortgage lenders should consider affordability both at the start of loan and after any changes in circumstances which could be reasonably anticipated. If a mortgage stretches beyond the borrower s expected retirement age, a fall in income after retirement might reasonably be anticipated and so ability to repay in retirement should be assessed. MCOB R requires providers to make affordability assessments for each customer, before entering into a regulated mortgage contract with them. A mortgage lender cannot limit assessment of affordability in retirement to certain categories (e.g. those over a certain age or those with mortgages stretched more than a certain number of years beyond retirement). They must assess the position of all customers who could reasonably be anticipated to face changed circumstances upon retirement. In making this affordability assessment, providers can base their decision on information provided by the customer, an intermediary or any other person, if it is reasonable to do so (MCOB 2.5.2R). In assessing whether it is reasonable to rely on information provided, firms might want to consider whether they have reasonable grounds for doubting the information provided. Financial Services Authority 5

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