Mortgage options for pensioners
In days gone by, when you retired you sat back and relaxed, enjoying the fruits of years of labour. But poor stockmarket performance, insufficient pension savings and longer life expectancy mean many people are now struggling to make ends meet after they reach their 65th birthday.
To add to the woes, an increasing number of people are hitting their pension years, and the substantial drop in income that entails, with mortgages still to pay.
A combination of falling house prices, people taking out mortgages later in life and interest-only mortgages mean more people haven't paid off their loan before they hit retirement age.
Finding the money to meet your mortgage repayments once you are living on a fixed income can be difficult. It's not surprising then that of the number of people claiming Support for Mortgage Interest (SMI), a benefit aimed at helping people meet their mortgage commitments, 52% are retired, according to figures from the Mortgage Market Review by the Department for Work and Pensions.
So what can you do if you are approaching retirement, or are already retired, and still have a mortgage to pay?
If you have enough left on your mortgage that you are going to have to continue paying it off for years to come it is worth speaking to your mortgage provider and a mortgage broker to see if you could move onto a better deal.
However, it may not be easy to get a competitive deal. "Although we are an ageing population, lenders have been reining back from allowing borrowers to continue with their mortgages into retirement," says Mark Harris, chief executive of mortgage broker SPF Private Clients.
"If you have got a mortgage in retirement, it is unlikely that you will find a great range of options available to you in terms of new deals and competitive rates. It may be that you must stick with your existing lender, which usually means staying on the standard variable rate (SVR).
SVRs vary considerably from lender to lender so it depends what yours charges as to whether your deal will be competitive or not."
Those customers with interest-only mortgages may find it particularly difficult. As many lenders have tightened their lending criteria, customers coming to retirement with these mortgages may well struggle to find a lender willing to extend their mortgage on this basis.
These customers will then find themselves having to switch to a repayment mortgage, meaning their monthly repayments go up at a time when they are trying to minimise their outgoings.
Minimum terms for remortgages may also affect certain customers nearing retirement. For example, if you are finishing work in three years and you want to be mortgage-free once you retire you may struggle to find a lender that will lend over such a short period.
Most will have a minimum of five years, meaning you'll be making repayments for two years into retirement.
This is why it can really pay to speak to a mortgage broker. They know the market well and can scour it for the lenders that are most amenable to older borrowers.
"Existing lenders will all have their own criteria but remortgage options may well be curtailed as not all lenders will want this business and the benefits of independent advice may well prove crucial to ensure deals are considered with niche as well as mainstream lenders," says Jon Tweed, national sales manager at Hodge Lifetime.
While many lenders will not allow borrowers to continue with a mortgage into retirement, the handful that do have strict criteria.
The primary concern for lenders when it comes to offering mortgages to older borrowers is whether they will have the means to repay it. However, the fact that people are working for longer means some lenders are becoming more lenient.
"There are lenders that will go past retirement age," says Fahim Antoniades, group director at Mortgage Centre IFA. "Those that do like to ensure that where they are asked to exceed retirement age, the borrower concerned has the means to carry on repayments past age 65.
"Typically, those who can carry on would be selfemployed (as such, they have the option to carry on working); would not have a physical job where strength and youth is key; or can demonstrate sufficient postretirement income to carry a mortgage. If that is the case the lender would typically offer a mortgage term that would run to age 75."
Each lender has its own criteria when it comes to lending to the over-65s. Leeds Building Society, for example, has a maximum age of 80 (at the end of the term). The maximum age at the date of application is 70, with a maximum loan-to-value (LTV) of 70%. Northern Rock will lend up to 75 years old, as will Santander and Coventry Building Society.
What to do before you retire to reduce your mortgage burden
If you can afford to make overpayments on your mortgage it may be worth finding out if your lender allows you to overpay. If it does, you could clear your mortgage faster and be mortgage-free by the time you give up work.
Speak to your lender
Your lender does not want you to be unable to meet the monthly repayments in retirement, so see what help it can offer.
Enlist a broker's help
A good whole-of-market broker can help to find the most suitable mortgage for you.
If you are struggling to remortgage, another option is to downsize - sell up, pay the mortgage off and use the remaining cash to buy a new, smaller home. Of course, there are emotional consequences to this.
"We've explored this concept of downsizing with people who are just about to retire," says Stephen Lowe, director of external affairs at Just Retirement. "They say, 'I've spent all my life creating this house I'm now about to enjoy. I'm not selling and moving to some pokey little pad.' The thought of downsizing is abhorrent to some people."
But equally, for others, a smaller, more manageable home can be the ideal solution.
Another option to consider is equity release. This allows you to withdraw some of the equity from your home in order to pay off your mortgage. The money you have borrowed from the equity release firm is then paid off when your home is sold - usually following your death or move into a care home.
"It's for people who don't have sufficient income to continue servicing debts," says Lowe. "The peace of mind the customer gets when they take an equity release lifetime mortgage is that they know they can live in that house until the day they die and that whatever happens you or your children will never have to pay more than what the house is worth (known as a no-negative equity guarantee)."
Borrowers just need to be aware that equity release firms aren't handing out free money. "It is a great tool for certain circumstances but it is an expensive form of mortgage lending, hence one must be careful else it could be the wrong the tool for the job," says Antoniades.
The problem of pensioners with mortgages isn't going to disappear, in fact, with people having to wait until later in life before they can afford the deposit on a home mortgages are, obviously, going to run until later on in people's lives. However, industry insiders say this is something lenders are aware of and, as a result, we may see big changes in the mortgage market in the future.
Antoniades says the system will adjust and reinvent itself. "For example, there could be intergenerational mortgage products where parents hand down mortgages to their children," he says.
However, for now, the best way to deal with mortgage debt in retirement is to see what deals are available and explore alternative options.
What to do to ease your mortgage burden if you are retired
Seek the state's help
The Support for Mortgage Interest scheme was created to help people who are struggling with their mortgages. If you are receieving pension credit you could qualify. To find out if you are eligible visit direct.gov.uk.
Consider equity release
While it is not the perfect solution for everyone, equity release can be a useful way of clearing an outstanding mortgage.
It may not be what you had planned to do in retirement but downsizing can help you to clear your debts.
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.
A “traditional” mortgage, where the monthly repayments entail of repaying the capital amount borrowed as well as the accrued interest, so that during the loan period the capital debt is gradually paid off so by the end of the term the mortgage has been fully repaid. One advantage of a repayment mortgage is that it removes the risk of having a parallel investment (such as an endowment policy or pension), the performance of which is dependent on the stockmarket, such as with an interest-only mortgage.
Every mortgage lender has a standard variable rate of interest, or SVR, on which it bases all its mortgage deals, including fixed and discounted rate and tracker mortgages. When special deals come to an end, the terms of the deal usually state that the borrower has to pay the lender’s SVR for a period of time or pay redemption penalties. The lender’s SVR is, in turn, based on the Bank of England’s base lending rate decided by the Bank’s Monetary Policy Committee (MPC). Every time the MPC raises its rate, mortgage lenders generally increase their SVR by the same amount but when the MPC lowers its rate, lenders are often slow to pass this on or don’t pass on the full cut to borrowers.
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.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
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.
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.
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.