Case Study 1 – mortgage into retirement

This case study highlights good practice and points to consider when assessing affordability in retirement.

Firms should assess whether a mortgage is affordable throughout the term, taking particular care when a mortgage runs into retirement as income and expenditure levels are likely to change.

Customer circumstances

Mr and Mrs James received advice when they recently re-mortgaged. Mrs James is a housewife with no income. Mr James, currently aged 45, is a teacher and a member of a final salary pension scheme with a normal retirement age of 60. They were recommended a capital and interest mortgage over 20 years, taking Mr James five years past his expected retirement age.

Good practice

Before recommending the term the adviser obtained confirmation that Mr James intended to retire at 60. The adviser considered reducing the term to 15 years to finish prior to retirement but Mr James was not happy with the increased mortgage payments.

Knowing the mortgage was to run into retirement the adviser conducted two assessments of affordability and recorded both on file:

The first looked at affordability prior to retirement using Mr James's current full-time teacher's salary. The adviser demonstrated the mortgage was affordable at the current standard variable rate.
The second looked at affordability in retirement. Mr James provided details of his expected pension income and when asked about likely changes to expenditure he confirmed this would probably remain unchanged.
Using this information the adviser demonstrated the mortgage was affordable in retirement, again using the current standard variable rate.

The adviser explained why he recommended a term of 20 years and that this meant paying the mortgage with reduced income in retirement for five years.
The adviser confirmed he checked the payments were affordable in retirement, using the information supplied, but warned Mr James this was based on current interest rates which might increase in the future.

Other points to consider

Firms should also consider the following points:

Better understanding of retirement issues – not all customers will retire at 65. Many occupational pension schemes allow members to retire earlier with good benefits.

Firms should go beyond simply asking the question about a customer's intended age of retirement and assess affordability using their expected position in retirement.

Relevant documentary evidence – if customers are unsure what their retirement income will be, firms should seek documentary evidence, such as annual pension statements from their occupational scheme.
Review practices and procedures – firms could review their fact find for example to include prompts to remind advisers to consider retirement where appropriate and to help demonstrate how customers are able to afford a mortgage in retirement.

Good and poor practice case studies

Affordability – your one-minute guide
Affordability factsheet