Getting a mortgage in later life
Retirement is changing. No longer do we quit work at 65 and start claiming our pensions. The age at which we’re eligible to receive our state pensions is inching up, and even those who have retired often continue working in some way.
But while new pension rules can accommodate these changes by enabling us to manage our retirement incomes more flexibly, the mortgage industry has not kept pace.
This means it can be difficult for older borrowers who may want a mortgage to buy a new property or remortgage their existing one.
David Hollingworth, communications director at mortgage broker London & Country, says problems for older borrowers began in the wake of the financial crisis in 2008.
The crisis led to the introduction of new tighter lending rules. These put greater pressure on lenders to ensure borrowers have sufficient funds to repay their loans. “The concern was that you have someone taking on debt at a time when they may not be best placed to repay it,” he explains.
This resulted in some lenders introducing maximum age caps – typically between 70 and 75 – stipulating the age at which borrowers are required to repay their loans. These caps gradually became standard practice.
However, while it may not be ideal carrying a mortgage into retirement, it can be necessary for those that have not fully repaid their mortgages. Dean Mirfin, technical director at Key Retirement Solutions, says: “A huge driver is interest-only mortgage maturities, where people either took an endowment and have a shortfall or people who have no repayment method at all.”
A mortgage can also be an effective tool for those who want to raise money against their home. Mr Hollingworth says: “It may be that they want to maintain their property or help a child or grandchild buy a property.” Alternatively, they may want to buy an investment property.
He adds that, for certain borrowers, this can be a better option than lifetime mortgages, also known as equity release, where older homeowners are able to borrow against the value of their home, but interest rolls up and the loan is only repaid when the property is sold. “Rates are lower than traditional equity release. There is the ability to protect an inheritance as there is no roll-up of interest.”
Lenders for older borrowers
While it may not be easy for older borrowers to get a mortgage, it’s not impossible. More lenders are starting to recognise the opportunity.
For some time, smaller building societies – which are able to assess each application on its own merits – have led the way. National Counties, Bath Building Society and Mansfield Building Society all have no maximum age cap – as does newcomer Metro Bank.
More recently, some bigger lenders have increased their age caps – Halifax, for example, increased its maximum age to 80 in May 2016, while in July Nationwide will raise its to 85.
“There is a lot of pent-up demand,” notes Aaron Strutt, product director at Trinity Financial. “People think it won’t be possible to get a mortgage if their own bank has said no, but banks are loosening their policies and following in the footsteps of smaller building societies. We are turning a corner.”
Getting through the affordability checks
But while extending age caps will help some borrowers, the experts are agreed it doesn’t fully solve the problem.
Mr Mirfin says: “Increasing the age you can borrow to looks great from a PR point of view, but how many more people will actually be able to get the loans?”
Following the Mortgage Market Review (MMR), which came into force in April 2014, the onus is now on lenders to prove that they have checked borrowers can afford their loans, and this has made it more difficult for everyone to get mortgages irrespective of age.
Compounding the problem is the fact that interest-only mortgages (which with lower repayments are more affordable) are increasingly hard to come by. This is because lenders find it difficult to assess repayment methods and would rather see the capital being repaid rather than just the interest. Of course, there is also the added risk that borrowers don’t have a savings vehicle in place to cover the capital, and end up having to sell their property to repay the mortgage.
A selection of mortgage options for over 55 (click to enlarge)
Source: Trinity Financial, correct as of 6 June 2016.
While lenders are able to make affordability assessments based on pension income and any other sources of income retirees may have such as earnings, investments, savings or a rental property – the pension freedoms, which offer retirees greater access to their pots, complicate matters.
“Lenders haven’t yet got to grips with the pension freedoms,” says Mr Mirfin. There are concerns, for example, that somebody who looks pretty wealthy could blow the lot. There is also the problem of how to underwrite income derived from a drawdown plan that is subject to stock market movements. “They will struggle with how to deal with a massive drop in funds,” he adds.
So even if a borrower is eligible for a mortgage by virtue of their age, they may still struggle to meet cautious lenders’ affordability assessments. “We are continually having to turn people away,” Mr Mirfin says.
New innovative products on the way
Some lenders are starting to consider alternative ways to serve this market.
Hodge Lifetime, which specialises in equity release mortgages, has launched a conventional mortgage that targets the over 55s. The product won the ‘Innovator of the Year’ award in the Moneywise Mortgage Awards 2016.
With a traditional roll-up lifetime equity release mortgage, instead of paying interest each month, you choose not to avoid make any interest or equity repayments for the rest of your life, but allow the interest to be rolled up and added to the loan so that the debt gets larger.
The amount you originally borrowed, plus the accumulated interest, which has been rolled up, is only repaid when your home is eventually sold, typically on death of the last applicant or when they need to go into care.
Mr Hollingworth says: “Hodge recognises that people don’t always want to roll up interest. Its deal runs though to 95, but it is interest-only so you do need a strategy to repay it.”
This strategy might be downsizing to a cheaper property or selling investments. However, the upside is that because the loan is interest-only, repayments will be more affordable.
Other lenders are taking simpler steps to make it easier to lend to older borrowers. Mr Mirfin explains: “Vernon Building Society had a major concern about dementia, because if the borrower became mentally incapacitated their assets could be frozen and the mortgage wouldn’t be paid.”
However, it has got around this by offering a discounted rate to borrowers that have arranged a Lasting Power of Attorney (LPA). This means that if the borrower cannot manage their mortgage a trusted individual can do so on their behalf.
While these steps are welcome, Mr Mirfin says the mainstream market needs more radical innovation, with lenders fundamentally changing the way they lend to over-50s.
“Older borrowers are different and need a different mortgage. They will have a changing level of income, changing lifestyle and in time may wish to service less of loan, a standard mortgage is not fit for service,” he adds.
“We are looking into products that can be part serviced by repayments and part by roll-up,” he adds. Such a hybrid product would effectively bridge the gap between conventional loans and equity release. Making the repayment element interest-only would also make the product more affordable.
While similar products are currently available from specialist equity release providers, many borrowers still fail to meet the requirements because they don’t have enough equity in their property.
Jeremy Duncombe, director at the Legal & General Mortgage Club, also says there is an opportunity for products that switch into roll up as borrowers’ circumstances change. “We need flexible products that allow you to convert during the term,” he says. “The Financial Conduct Authority is looking into this and we expect to see a lot of innovation in the next 12 to 18 months.”
But Mr Mirfin stresses that lenders don’t have time on their side: “We need these products as a matter of urgency for interest-only mortgages that are coming to maturity now. We can help around 50% of them with existing products but what about the other half that can’t get a mortgage? Even lending to age 100 won’t help.”
However, lending into retirement is not just about providing options for those who desperately need it, it’s about making affordability decisions on factors other than just age.
“Borrowers feel they are being discriminated against,” says Mr Hollingworth. “Some people may have lots of equity in their house which they want to access as well as the income to service the loan.”
If you’re unsure about which mortgage option is best for you in retirement, get in touch with an independent whole of market mortgage broker to discuss your options.
Equity release not suitable for younger retirees
Traditionally, homeowners who have needed to raise money from their property in retirement have turned to equity release products.
This is more often than not with a lifetime mortgage that offers a cash lump sum (or access to tranches of funds), which is then repaid when the property is sold (usually on death or a move into long term care). However, as such borrowers do not usually have the income to service the loan, interest rolls up until the loan is repaid, rather than being paid on a monthly basis as it would with a conventional mortgage.
Lifetime mortgages are typically available from the age of 55. However, because interest rolls up, the longer you live, the more expensive they become, and this means they may not make as much financial sense to younger retirees.
Figures from LV= show how quickly the debt can build. With a rate of 5.2% a £10,000 loan would grow to £16,602 after 10 years, £27,562 after 20 years and £45,759 after 30.
So before taking out an equity release plan, it is important to seek financial and legal advice and discuss the matter with your family as it could eat up all the equity in your property. It also vital to ensure your lender is a member of the Equity Release Council – this will give you a ‘no-negative equity guarantee’ which means you will never owe more than the value of your home. It also ensures you can move into an alternative property if you choose.
What will you do when you have paid the mortgage off?
Finally paying off your mortgage is a big milestone, but what will you do with all that extra money once you’ve cleared this debt?
According to research from Saga Investment Services, over 50s are typically better off by £322 a month once they’ve paid off their mortgage. Of the survey respondents, half put some into a savings account, 45% splashed out on home improvements, 40% put it towards holidays while 27% treated themselves to a new car.
Just 23% put any of their ‘mortgage pay rise’ into their pension, and of those that did just 40% of this additional income was used to top up their pot.
Investing surplus income into a pension is a great way of supercharging your pension. This is because you get tax relief, equal to the rate of income tax that you pay, on your contributions.
As a result Saga Investment says those homeowners that do manage to repay their mortgage before they retire could boost their pension by an average of £40,000 if they redirect this income into their retirement savings.
Swapping a mortgage for a pension: how much could you save?
- Average retirement age: 62
- Average age mortgage is repaid: 55
- Average monthly ‘pay rise’: £322
- Potential value of new pension savings: £40,550
Note: Figures assume 100% of average monthly mortgage repayments are invested into a pension, with pension contributions attracting basic-tax relief of 20%, plus a 5% annual growth rate, net of charges for the time between the age at which the mortgage is repaid and retirement age. Source: Saga Investment Services, June 2016.
An equity release scheme, where the money borrowed against equity in the property (up to a maximum of 50%) is subject to interest charges and although the borrower makes no payments during their lifetime, the monthly interest repayments will roll up and be added to the original debt, which will be settled on the borrower’s death. A lifetime mortgage is distinct from a home reversion scheme in that the lender never owns part of the property. But most lifetime mortgages are sold with a no negative equity guarantee. This means that if the loan is greater than the property’s value it’s a problem for the original lender and not the homeowner.
The circumstances in which a property is worth less than the outstanding mortgage debt secured on it. Although it traps householders in their properties, the Council of Mortgage Lenders (CML) says there is no causal link between negative equity and mortgage repayment problems. At the depth of the last housing market recession in 1993, the CML estimated 1.5 million UK households had negative equity but most homeowners sat tight, continued to pay their mortgages and eventually recovered their equity position.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
Lasting power of attorney
Refers to the legal document which allows an individual (donor) to nominate a person or people (attorneys) to make decisions on his or her behalf should they reach a state where they no longer have the mental capacity to make certain decisions. LPA can be divided into two groups: the donor’s financial wellbeing and their health and general welfare. You can choose anyone you trust to act as your attorney provided they are over 18 and not bankrupt when they sign the form and you can appoint more than one person to act and can choose whether they can act together or independently. An LPA is a powerful and important legal document and you may wish to seek advice from a legal adviser with experience of preparing them.
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.
A term to describe financial products or ‘plans’ that help older homeowners turn some of the value (equity) of their homes into cash – a lump sum, regular extra income, or sometimes both – and still live in the home. There are two main types of equity release: lifetime mortgages and home reversion plans (see separate entries for both). Whichever type you choose, you borrow money against the value of your property, on which interest is charged, and the loan is repaid when the house is sold after your death.
An alternative to an annuity, income drawdown (also known as an unsecured pension) allows you to take income from your pension fund while the fund remains invested and so continues to benefit from any fund growth. The drawdown of income has to be calculated carefully as taking too much income could exhaust the pension fund so experts say the annual drawdown must not exceed what the assets would normally yield in an average year. The invested pension fund could also be hit by market turbulence and the value of the assets could fall.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.