Looking at some evidence from the major mortgage providers, David Kingman argues that a toxic combination of new regulations, worsening affordability and pension changes may be conspiring to keep “Generation Rent” off the housing ladder
The hopes that many members of Britain’s “Generation Rent” have of one day being able to own homes of their own may be thwarted by changes to mortgage regulations, according to a recent report from a group representing many of the UK’s biggest mortgage providers.
Older mortgage borrowers “out in the cold”
The report, entitled The Changing Face of Non-standard Mortgage Lending, was published by IMLA, the Intermediary Mortgage Lenders Association, an industry body. It looked at the impact that new financial regulations, implemented since the global financial crisis, will have on lending behaviour.
One impact particularly highlighted by the report is that lenders are likely to become much less willing to lend to customers who will still be repaying their mortgage when they retire (given that a standard mortgage term is 25 years, the age of 40 is being widely used as a cut-off point).
This is because the new rules that lenders to have to follow, known as the Mortgage Market Review (MMR), stipulate that mortgage providers now have a legal duty to ensure that any new borrowing they issue will be “affordable” for the entire duration of the loan.
As the vast majority of private sector workers are only enrolled on defined contribution pension schemes (if they are saving for a pension at all), it is frequently impossible for them to project what their retirement income is likely to be with any degree of certainty. IMLA complain in their report that this means many lenders are worried about being judged to have “mis-sold” the original loan if it subsequently turns out that the borrower can’t afford to keep up with repayments should their income fall after they retire.
IMLA’s report explains that many of its members have responded to this new threat by reducing the maximum age at which they willing to lend to new mortgagors, a change which has, as they put it, left potential borrowers who are over the age of 40 “out in the cold”.
Older first time buyers
The reason why this change poses a danger to the aspirations of homeownership among Generation Rent is that many of them are unlikely to be able to get on the ladder much before they reach this age.
Research suggests that the average first-time buyer is currently in their early 30s, so thousands of borrowers will be older than this. Looking at a national average by itself is also misleading, as location and whether the perspective buyer receives any help from their family are both extremely important.
Many borrowers who have managed to get on the ladder might want to re-mortgage around the age of 40 in order to get a family home which is big enough for them to raise children in – yet it is not clear how the regulations will affect re-mortgaging decisions.
Should it become the new norm among mortgage lending to refuse to issue new products to borrowers who could still be making repayments after they retire, then the hopes of Generation Rent would suffer a real blow.
IMLA is alert to the risk that this poses, and asks for the Financial Conduct Authority – which regulates mortgage lenders and drew up the MMR – to clarify some of the terms used in the new rules so it becomes clearer how much responsibility lenders have to ensure that mortgages will still be affordable decades after they are first issued.
As IMLA’s executive director Peter Williams argues, “To avoid a situation where regulation brings about the extinction of mortgage terms that stretch into retirement, we need clarity and confirmation about where the boundaries of responsible lending truly lie.”