Hope for older borrowers under MCD
The Financial Conduct Authority is considering a review of its affordability rules for older borrowers with a more relaxed approach likely under the Mortgage Credit Directive.
Robert Sinclair, chief executive of the Association of Mortgage Intermediaries, said he had been party to closed conversations with the regulator about how strictly lenders have to apply the affordability rules.
Under the Mortgage Market Review affordability must be assessed “over the lifetime of the product”.
But Sinclair said that the FCA was aware that this was impractical for most older borrowers and he suggested that there would be scope to relax the interpretation of this rule under forthcoming regulation from Europe.
He said: “The rule that causes the most problems is the rule that says lenders must evidence affordability for the life of the product. If that one set of words wasn’t there, the world would be entirely different.
“When you speak to lenders this is the issue: you can’t assess anything beyond five years in all honesty. When you speak to the FCA in private they acknowledge that.
“The problem is the rules don’t reflect that discussion. Even the Prudential Regulatory Authority is in the place where they agree that once you get past five years, how on earth do you know what a person’s income will be?”
Sinclair said it was possible though not probable that the regulator would formally remove the wording.
He said: “The Mortgage Credit Directive only looks at affordability – it doesn’t stress for the lifetime of the product. So it could be amended by the FCA if they had the appetite to do it.
“However, I think sensible lenders are already getting into that practical space. Not ignoring the rule but applying it pragmatically. It is now about gradually pushing the boundaries back on this.”
A statement from the regulator said: “We proposed to implement the MCD creditworthiness assessment requirements through our existing MCOB affordability rules. We received strong support for this approach, and intend to proceed on this basis.”
Sinclair added: “We need to get back to a more sensible and pragmatic place with all of this with not trying to prove income in minute detail all the way to the end of the product term.
“A reasonable assessment, done by good lenders, is to consider what assets there are, what income is likely and what its longevity is.”
Peter Izard, business development director at Investec Private Bank, said it was already possible under MMR to take into account borrowers’ investment income when assessing affordability – something which mainstream lenders generally refuse to do and which has held back older borrowers from getting a mortgage past retirement.
Izard said: “The starting point for us is looking at the client’s profile to get a really good understanding of their situation. Whether their income is derived from investment or bonus income is not as important as the track record of their income.
“Investment income is no different from any other type of income – it’s the appropriateness of that income and its history that matters. There are no hard and fast rules about what income a lender is allowed to consider, it’s just a matter of understanding the individual client’s needs and circumstances.”
Sinclair said one of the biggest hurdles facing older borrowers was lenders’ lack of willingness to consider more variable income in the wake of falling annuity rates and the demise of final salary pension schemes.
He said: “One of the problems is that the large institutions want to run everything through a computer model that says yes or no.
“Arguably final salary pension schemes are more certain than employment income, but even they aren’t certain because the pension scheme could crash. There is no certainty in the world.”
Ray Boulger, senior technical manager at John Charcol, added: “The pension changes are going to make it increasingly necessary for lenders to think outside the box on affordability for older borrowers.”