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SPECIAL FEATURE: Pension ripples reach mortgage market

Robyn Hall

January 21, 2015

Quite apart from the tsunami that hit the annuities market, the financial sector has been shaken up by several other budget-driven changes.

Amongst these is one which really divides opinion: the inter-relationship between pensions and mortgages.

The new freedoms regarding pension drawdown really have opened-up a wide range of options for homeowners.

From April next year, retirees will no longer be forced to use their pension fund to buy an annuity and will be allowed to access all of their savings.

Estimates suggest that one in 10 people aged 40-70 plan to use their tax-free lump sum to repay the outstanding balance on their mortgage while a further five per cent plan to use their pension pot to pay off mortgage debt.

If those findings are mapped across the population of England, that means almost 600,000 people will use some or all of their pension to repay their mortgage.

But is that a good, or a bad thing?

Many MPs and pensions experts fear that the opportunities which were made available are being misrepresented, with too much focus on the ability to cash out.

Not unnaturally, they are concerned about the impact it may have upon lending into retirement, and suspect that borrowers will increasingly be pressured by lenders to use pension funds to pay off interest-only mortgages at maturity.

Worryingly, that could have a knock-on effect on the average term of a mortgage loan. People aged 55 or over are already finding it more difficult to secure a loan and this could cascade down to the 40-plus bracket. The current average age of a first time buyer nowadays is reckoned to be between 30 and 35, so the cause for concern is not unjustified.

Lenders say that lack of clarity in the Mortgage Market Review rules has resulted in older borrowers being frozen out. MMR stipulates mortgages must be affordable for the lifetime of the loan and they are claiming that it is hard to determine how affordable a loan may prove to be beyond the point of retirement.

On the other side of the coin, there are believed to be as many as 1.7 million people who have no way of bridging the interest-only gap on their mortgage. So is utilising their pension pot the perfect solution?

There are obvious concerns that although it is natural for people to want to retire debt-free, the purpose of these savings are to ideally provide an income for their retirement – which can last up to 30 years or more. Yet it could be argued that in many cases it makes sense to clear debt rather than sit on money that is earning poor returns.

Making it even more of a muddied field is the fact that lenders will have to tread very warily. Encouraging people to use their pensions to pay their mortgages or giving advice on what to do with their pensions could be seen as investment advice. The FCA would potentially take a very dim view of that…

Good or bad, I have to hold my hands up and confess that I can see both sides of both sides.

People clearly need to think carefully before using their pension fund in this way. Whatever course is taken, the industry has a massive responsibility, as ever, to ensure that whatever is recommended is in the customers’ best interests.


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