Lending into Retirement Case Example

Current practice

During the last couple of months the firm has received calls from three of its older customers who are starting to have problems meeting their post-retirement mortgage payments and were looking to switch mortgages. Two of the borrowers in question have similar problems – saying that investments hadn’t performed as expected alongside their pension income and/or they hadn’t anticipated their level of outgoings after retirement. In a further case the borrower had been over optimistic when self certifying income from self-employment, which he had said would continue in later years and supplement his pension.

Mindful of TCF and press coverage of problems surrounding lending into retirement the firm decides to review all cases in the last six months where the loan would go into retirement to see how carefully affordability was assessed.

TCF problem

While the firm’s Fact Find correctly requires brokers to assess affordability at the time a mortgage is taken out (by asking for details and evidence of current income and outgoings) it can see that its instructions for assessing affordability at post retirement aren’t sufficiently specific. For example, if a customer is within seven years of the State retirement age – a relevant cut off point for many lenders - brokers are simply required to ‘…discuss with them how they will meet the mortgage payments after they retire.’ A short text box is provided for the answer – and collecting information at this level has generally been sufficient to meet lenders’ requirements.

In all the cases reviewed, discussions relating to affordability after retirement had been restricted to asking the borrower which funds they intended to use to meet the payments. No attempt had been made to ‘quantify’ or ask for documentary evidence for the post retirement funds and no discussion had taken place about likely outgoings against this income. Furthermore, in the case of self-employed applicants, there was no evidence to suggest that the broker had discussed with borrowers how realistic their future self employment income projections might be. Where the borrower was many years from retirement no discussion appeared to have taken place at all. All of these points were making it easy for borrowers – including those very close to retirement age - to borrow into retirement without properly considering affordability.

TCF solution

A few simple checks and balances could help brokers better assess (and customers properly consider) likely affordability after retirement - thereby protecting the borrower’s interests and reducing the likelihood of arrears:

Fact Find

• The Fact Find could include a mandatory question ‘Expected year of retirement?’ followed by a YES/NO ‘trigger’ question ‘Will the mortgage will extend into retirement?’
• Ticking YES could trigger requirements as follows:
  • the broker could be required to read out a prescribed statement (and include this statement in the ‘Suitability/Reasons Why’ letter) alerting the borrower to the fact that their income is likely to reduce after they retire and that they will need to have a plan in place to cover the payments – the written procedure would evidence a culture of TCF and the file record would evidence that the customer was made aware of the need to consider affordability
  • the broker could then be required to ask the borrower additional questions relating to the anticipated amount of post-retirement income, broken down by source – to be completed and recorded for both Full Status and Self Cert cases
  • for both Full Status and Self Cert mortgages sales procedures could require consultants to encourage the customer to provide documentary evidence for the expected sources of income – eg evidence of payments into a pension scheme, savings/investment statements, accounts etc – even if these aren’t mandatory in the lender’s guidelines
  • if the customer can’t provide documentary evidence, the broker could be required to get written confirmation from them (or to record the information themselves in writing as evidence of a conversation)
    • that they understand that the mortgage runs beyond their expected retirement date
    • detailing which source/s of income/capital they expect or plan to use to meet payments in later years – giving anticipated values where possible
    • that they understand that their income will need to be reviewed at a given date in the future
  • the borrower could also be asked to say how they think their outgoings might change after they retire; perhaps giving an estimate compared to the current outgoings figure and reasons for this change (this might include reductions such as reduced travel/clothing/subsistence costs)

‘Mortgages in retirement’ customer statement

At the relevant point in the Fact Find, the broker could be required to read out a ‘mortgages in retirement’ customer statement explaining the reasons for the additional affordability questions and how completion of these will help protect the customer’s interests.

Customer follow-up

All cases where the mortgage is due to extend beyond State retirement age could be flagged for review/customer contact at one or two key dates.  At these times the customer would be reminded that they will need funds to continue to meet payments after they retire, and that they should seek financial advice or get in contact if they are unsure of what their future income will be or are concerned that it may not be sufficient to meet the payments. In addition, borrowers who hadn’t previously provided documentary evidence of expected income in post-retirement could be asked do so at this stage. Borrowers could also be asked to confirm actual changes to outgoings and income after they have retired.

TCF incentives

Finally, successful completion of the affordability questions and communication of the prescribed statements/record keeping of telephone conversations could be monitored during file checks and linked to TCF performance incentives.

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