Financial euthanasiaPosted on: 29 November 2013 by Olderiswiser Editorial
How the Financial Conduct Authority’s Mortgage Market Review will affect people with property in retirement
Recent legislation and policy is forcing your financial adviser to adopt the role of miracle worker or magician – as well as, potentially, pushing anyone over fifty into situations they neither desire nor have planned for in their twilight years.
We are talking about home ownership and mortgages – and the Financial Conduct Authority’s Mortgage Market Review, a document that has provoked many lenders to raise the drawbridge and whose recommendations come into force next April (26th). (1)
The MMR was a comprehensive review of the mortgage market, which started with a Discussion Paper in 2009 and culminated in a Policy Statement and final rules in October 2012. It stated: “It had become clear by the height of the market in 2007, that, while the mortgage market had worked well for many people, it had been the cause of severe hardship for others.” (1)
The FCA’s aim is to “reform the mortgage market to ensure it is sustainable and work better for consumers.”
Tell that to anyone approaching retirement, trying to obtain another mortgage. Not only have lenders almost abolished “interest only” loans, but they have also been slashing the age-cap (the age you are when the mortgage ends) on mortgages. (2)
That seems ridiculous when we are working and living longer.
It has a huge impact on your choices – assuming an interest rate of 5%, a £100,000 repayment mortgage over 10 years will cost you £1,060 a month, and interest-only £416.67. Over 15 years, the monthly repayment cost is £790.79 and 20 years, it’s £659.96 (the interest-only, naturally, amount remains the same).
With the 10-year repayment mortgage, you will pay £127,279.20 and be debt-clear – with interest only, you pay £50,000 – and still have the £100,000 mortgage. Over 20 years, the repayment will cost you £158,390.36 (debt-clear) and the interest-only £100,000, with the £100,000 debt still outstanding.
In those terms, the repayment mortgage looks the better option. This is where we come to the elephant in the room and the real issue with the FCA’s review that’s forcing aging homeowners into a shrinking corner.
Someone, somewhere, somehow has decided that selling your home is not the way of repaying your mortgage debt.
It’s ok for a buy-to-let (although that mortgage market is also getting tougher) – but the FCA would rather you sell your house and downsize if you can, or go the less-than-financially attractive equity-release route or clear the mortgage debt by selling other assets, so you have little to live on in your retirement
And the further consequence of the FCA’s judgment is that with no loan to repay, HMRC Revenue and Customs is likely to get a bigger 40% share of your Estate after the £325,000 exemption limit.
Is there really a financial advantage in owning and living in a home that is free of debt? Where is the issue in owning an asset that will repay your debts when you die? No wonder your financial adviser has a lot of explaining to do.
When lenders have been criticised and attacked over the recent draconian lending criteria for older citizens, they hide behind the FCA’s deliberations and the comfort blanket of “responsible lending”. (3)
No arguments there. No one wants to return to the crazy days of 125% mortgages to purchasers totally reliant on a rise in house prices to service and repay that debt. In the USA, when the financial obituaries were written, we learnt of horrors stories of mortgages being sold to those with no job, no savings and no security. Madness.
But we are going from one extreme to another.
What’s the problem with passing away with a mortgage outstanding on your home, especially if that mortgage has enabled you to remain there and enjoy a decent standard of living in your twilight years. What’s the problem with you using your home as security, on its current value.
Hopefully, lenders will take note of the FCA’s recommendation that “affordability” is the key, plus “lenders will still be allowed to grant interest-only loans, but only where there is a creditable strategy for repaying the capital.” (1)
Unfortunately, advisers have not had clear direction about whether the sale of the property is part of “creditable strategy.” (1)
Why wouldn’t it be? If lenders restricted interest-only mortgages to no more than 30% of the property’s value, then that’s “responsible lending”.
Lenders also enjoy hiding in the shadow of the “property-market correction” – but history shows this is another smoke-and-mirrors illusion.
Through the worst recession since the Great Depression, the British home (in most areas) has stood tall and firm against the financial storm. The only dip on the average UK House Price was in 2009 when it dropped to £188,000 (to just about 2006 levels). It was back to £207,000 in 2010, £218,000 in 2011, £234,000 in 2012 and way up to £247,000 this August. (4)
If you want to check the sense in investing in bricks and mortar, the average UK price in 2002 was £122,000, in 1992 £61,000, in 1982 £24,000 and in 1972 £7,000. When records began in 1969, it was £5,000. (4)
It is clear the British property buyer in recent times has shown far greater financial sense than the bankers who are supposed to know best. Maybe that’s why the lenders now seem to be bearing a grudge and making life as difficult as possible for the baby boomers.
Those home owners approaching retirement have been getting it right much longer than the banks have been getting it wrong!
1. FCA Mortgage Market Review – 9th October 2013
2. FT Adviser – Mortgages – 25th September 2013
3. Telegraph - Personal Finance – 29th September 2013
4. The Daily Mail – 15th October 2013
The value of shares and investments can go down as well as up. Your home may be repossessed if you do not keep up repayments on your mortgage.
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