Is pension shake up a lifeline for interest-only borrowers?
The flexibility injected into pensions by yesterday's Budget could be a lifeline for interest-only borrowers, according to a leading mortgage broker.
Jonathan Harris, director of mortgage broker Anderson Harris, said: "The removal of the need to take out an annuity gives more flexibility to pension funds and it will be interesting to see whether lenders will now be more prepared to consider such funds as a reasonable repayment strategy for an interest-only mortgage."
He said his company have had clients with large pension pots who have been refused interest-only mortgages in the past because "lenders have not considered these funds suitable for paying back the capital".
He added: "With the rules changing, it may mean more options for borrowers."
However, David Hollingworth, spokesperson for broker London & Country, thinks it's very unlikely that greater pension flexibility would have any bearing on interest-only lending.
He pointed out that the lenders who do already take pensions into consideration when approving home loans are only interested in very large pots.
Halifax, for example, insists on a pension fund with a minimum current value of greater than £1 million and then only up to 25% of the current fund value can be used to support interest-only lending. "That would exclude most pension savers," he said.
"I think lenders would be very hesitant to allow a interest-only borrower to refinance a mortgage based on their potential ability to take more money out of their pension. They'd be accused of snaffling the bulk of the borrower's pension," he added.
"The whole point of the changes to pensions in the Budget [which removed the requirement for retirees to purchase annuities] was to make it easier for people to support themselves long term in retirement – not wiping out shorter-term debt.
"I'd be surprised if we see any more lenient lending criteria come in based on this change."
Gross lending up
Meanwhile, total gross mortgage lending was £15.2 billion in February – the highest figure for a February since 2008, according to the Council of Mortgage Lenders (CML).
While this is 6% lower than January's figure of £16.1 billion, it is 43% higher than in February last year.
Jonathan Harris commented: "First-time buyers continue to return to the market in their droves, boosted by both elements of the Help to Buy scheme and better availability of high loan-to-value products more generally. With no interest rate rise on the horizon until next year at the very least, and mortgage rates still exceptionally low, it is an excellent time to get a mortgage.'
However, Ian McGrail, managing director of broker First Mortgage, added: "This growth looks set to continue steadily into the year, although we would expect activity to slow down temporarily at the end of April when the Mortgage Market Review comes into effect, as lenders get to grips with the reality of the reforms imposed."
A loan in which the borrower pays only the interest on the sum borrowed for the life of the mortgage but, at the end of the mortgage term, they still owe what they originally borrowed as this remains unchanged. The advantage of an interest-only mortgage is the monthly repayment is considerably lower than for a comparable repayment mortgage. Lenders generally insist the borrower also invests in an endowment, ISA or pension savings policy that, on maturity, is intended to pay off the capital loan.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.