Q I recently applied for a mortgage and passed the “agreement in principle” and valuation stages but was knocked back at the affordability check for the amount I needed. The reason? I’m paying the relatively high amount of 6% of salary into my pension.
The lender viewed this as reducing my disposable income and was concerned that should interest rates rise I may not be able to keep up my mortgage payments. However, my pension payments are entirely voluntary and can be cancelled at any time. So if interest rates rose I would cancel my pension to keep paying my mortgage like any sensible person.
Given my employer matches my contribution 1.5 times (so a 6% contribution means 15% of my salary is going in each month) I would have thought this was an economically sensible course of action demonstrating my long term financial planning skills.
If I had known about this I could have cancelled three months of pension contributions so it wouldn’t appear on my payslips. Had I done this I would have been able to borrow the full amount I was looking for.
Do all mortgage lenders take pension contributions into account? And can you explain the thinking behind doing so? Would you advise other readers looking to access the full range of mortgage products to cancel their pension for a few months to boost their chances? CB
A No, I most definitely would not advise other readers to cancel their pension contributions for a few months to boost their chances of getting a mortgage. In the words of pensions minister, Steve Webb: “Nobody should be encouraged to stop paying into a pension scheme in order to secure a mortgage’. I also suspect that suspending expenditure just for three months to make your payslips look good could be construed as manipulating income and so mortgage fraud.
I cannot explain why, according to a survey by Money Marketing late last year, some lenders – such as Barclays, HSBC, Coventry building society – do take contributions into account and some, such as those in the Lloyds Banking Group (which includes Halifax), Royal Bank of Scotland and NatWest, don’t.
Nationwide building society takes a different approach and assumes a certain pension contribution level for all mortgage applicants so that customers saving into a pension are not disadvantaged. And some lenders take a view on pension contributions depending on how they are paid for. For example, pension contributions deducted from salary – and so already taken account of in the net pay figure on a payslip – can be ignored whereas those that are paid for out of a current account are treated as monthly expenditure and so are included in an affordability check.
The director of mortgage and consumer lending at the Financial Conduct Authority (FCA), has stated that the rules that came into force following the mortgage market review do not consider pension contributions to be “committed expenditure” because “borrowers have the ability to flex pension payments and could, for example, reduce the amount they pay into their pension for a period”, as you suggest. So lenders can “exercise judgement as to the extent to which they need to factor pension contributions into an affordability assessment”.
If you think that your pension contributions are going to be a deal breaker, it would make sense to use a mortgage adviser who can point you in the direction of a lender who will not take them into account.
Muddled about mortgages? Concerned about conveyancing? Email your homebuying and borrowing worries to Virginia Wallis at virginia.wallis.freelance@theguardian.com
