Pensions & mortgages, Steve Webb deeply concerned

jamesd

Interesting story about Steve Webb, pensions minister, being deeply concerned about mortgage lenders treating pension contributions as non-discretionary spending in mortgage affordability calculations.

This tax year I expect my pension contributions to be around 45% of my gross base salary. Next year after the pensions changes probably about 78%. Any mortgage lender who doesn't think most of that is discretionary seems not to have a good grasp of reality.

Thrugelmir

Financial management is best left in the hands of the now very effective FCA. The Brown years was a clear demonstration of what damage light touch and totally inappropriate regulation can do.

Financial prudence will benefit us all in the long term. .

kingstreet

Q - Can you stop paying this if your circumstances change and you need to concentrate your income on essential expenses?

A - Yes.

In which case, it should not be treated as a commitment the borrower has no alternative but to pay. It is completely voluntary.

Thrugelmir

kingstreet wrote: »

In which case, it should not be treated as a commitment the borrower has no alternative but to pay. It is completely voluntary.

Where would you draw the line? Could apply to any number of outgoings.

dunstonh

Interesting story about Steve Webb, pensions minister, being deeply concerned about mortgage lenders treating pension contributions as non-discretionary spending in mortgage affordability calculations.

The FCA changed rule RU64 about 2 years ago. Effectively, it makes opting out of workplace pensions the same as opting out of an occupational pension scheme. That makes it a very high risk advice transaction. All mortgage provision is now advised. If the FCA found lenders were advising people to opt out of pensions to afford mortgages, it would rip the lenders to shreds.

jamesd

If the FCA found mortgage lenders were advising people to opt out of pensions the FCA would rip them to shreds for giving advice that they are not authorised to give. Yet that is in effect what they are doing today in many cases when they treat pension contributions as committed expenditure.

An authorised pension person is presumably going to tell a mortgage borrower to cut their pension contributions if the alternative is defaulting on their mortgage and having their home repossessed. But not until then, at least for some level of pension contributions - mine are on the high side.

Of course I also have sufficient money invested to meet my minimum retirement income level so all of my own pension contributions are purely discretionary at this point.

Thrugelmir

jamesd wrote: »

If the FCA found mortgage lenders were advising people to opt out of pensions the FCA would rip them to shreds for giving advice that they are not authorised to give. Yet that is in effect what they are doing today in many cases when they treat pension contributions as committed expenditure.

Define committed expenditure.

Don't forget there's a general election on the horizon. Cheap words offer little value.

jamesd

Personally I'd prefer two definitions to reflect two levels of stress:

1. Whatever the mortgage payer can't practically cease in time to be useful in avoiding a mortgage default.

2. Whatever the mortgage payer can cease without having a substantial effect on their current lifestyle.

2 for base affordability, 1 for interest stressed affordability. Pension contributions would be in neither, since reducing them does not reduce current lifestyle.

Current lifestyle? Defined by the borrower when it comes to things like going out every night that mortgage borrowers would in general be willing to reduce to achieve their home ownership objective. But not when it comes to paying the mortgage and utilities or some level of car if required to get to work.

And personally I'd also add:

3. Allowance for capacity to use savings and investments to pay the mortgage interest and/or capital to avoid default.

That's because someone with savings of say three times their mortgage balance is not likely to fail to make mortgage payments due to a lack of affordability.

Thrugelmir

jamesd wrote: »

Personally I'd prefer two definitions to reflect two levels of stress:

1. Whatever the mortgage payer can't practically cease in time to be useful in avoiding a mortgage default.

2. Whatever the mortgage payer can cease without having a substantial effect on their current lifestyle.

2 for base affordability, 1 for interest stressed affordability. Pension contributions would be in neither, since reducing them does not reduce current lifestyle.

Current lifestyle? Defined by the borrower when it comes to things like going out every night that mortgage borrowers would in general be willing to reduce to achieve their home ownership objective. But not when it comes to paying the mortgage and utilities or some level of car if required to get to work.

And personally I'd also add:

3. Allowance for capacity to use savings and investments to pay the mortgage interest and/or capital to avoid default.

That's because someone with savings of say three times their mortgage balance is not likely to fail to make mortgage payments due to a lack of affordability.

That in essence is a borrowers perspective. Not that of a lender operating a billion pound mortgage book. Micro level management is simply not feasible in what is a low margin lending activity. Lenders have to operate at a macro board level lending policy.

amnblog

Thrugelmir wrote:

now very effective FCA.

Are you sure Thrug?

You probably do not contribute funds to them to waste like I do.