New opportunities for older mortgage borrowers

22 June 2018

It used to be extremely difficult to be approved for a mortgage in your 60s, but there are now providers that are willing to be more flexible.

Paying off the mortgage before reaching retirement used to be a reason to celebrate. But thanks to demand and a more relaxed approach from lenders, borrowers are increasingly finding that a mortgage can be a valuable financial tool in later life.

For some people, it’s a matter of necessity. "A change in circumstances such as divorce, redundancy or an accident can leave people still paying a mortgage at retirement,’ says Ray Boulger, senior mortgage technical manager at John Charcol. "People can also be left with mortgage debt where they’ve gone for an interest-only deal and can’t clear the outstanding balance."

Demographic shifts will also push up the probability of carrying mortgage debt into retirement. With the average first time buyer now aged 32, it’s trickier to become mortgage-free.

Not all the reasons for a later mortgage are negative, however. "We see plenty of older borrowers taking out mortgages to help kids and grandkids onto the property ladder or for inheritance tax planning reasons," Mr Boulger adds. "The money can also help if they want to adapt or maintain their home, or they simply want to enjoy retirement more."

Changing attitudes

Whatever the reason for a mortgage in later life, many older borrowers have struggled to find lenders who will entertain their request. While some of the blame lies with lenders’ caution following the financial crisis, David Hollingworth, associate director at L&C Mortgages, says it was also exacerbated by the Mortgage Market Review which came into force in 2014.

This shifted the focus to affordability and the vulnerability of the borrower. "Having a mortgage in retirement was seen as a bad thing, and many lenders slapped maximum age caps of 70 or 75 on their products," he explains. "But with more people working longer, attitudes to older borrowers have relaxed."

As a result, although some have stuck fast to 70 and 75, it’s now quite possible to find lenders who are comfortable to lend to age 80, with some going even further. For example, Halifax increased its maximum age at the end of the mortgage term from 75 to 80 in 2016, while Nationwide shifted its maximum age from 75 to 85.

Some go further still. The Family Building Society, for instance, is happy to let a 70-year-old take out a 16-year mortgage and will even arrange a five year mortgage for an 89-year-old.

According to Keith Barber, associate director of business development at Family Building Society, decisions around lending do not come down to age. "It’s about affordability," he explains. "If someone can demonstrate they have the income, we can lend them money. From a lender’s perspective, someone with a final salary pension is probably less risky than a 40-year-old who’s working."

What lenders take into account when assessing affordability does vary. For example, while some want to see evidence of fixed pension income, others will also take into account investment income, rental income and income from employment.

In some instances, borrowers can find themselves having to produce evidence of both their work and retirement income. For example, at Nationwide, if the mortgage term takes you beyond age 70 or your intended retirement age if that’s earlier, you will need to provide evidence of your retirement income. If you’ve got more than 10 years to retirement when you apply, demonstrating that you have a pension is sufficient, but less than 10 years and you’ll need to provide evidence of how much retirement income you’ll receive.

Shopping around can help if your retirement plans don’t fi t those of the lender. For instance, Gemma Harle, managing director of Intrinsic mortgage network, says some lenders will take earnings from employment into account beyond age 70. "It will depend on your job and how realistic it is that you’ll carry on working," she explains. "It’s less likely for a manual job, but it’s perfectly reasonable for someone employed as a receptionist to keep working well into their 70s and beyond."

Much more choice

While the more relaxed rules around borrowing make it easier for people who may still be trying to pay off their mortgage in their 60s, there’s also much more choice for people who simply want to tap into the equity in their home.

As an example, Ms Harle points to Hodge’s 55+ Mortgage, describing it as a hybrid between a lifetime and a standard mortgage. "With this, you select a term for your mortgage and pay interest every month, repaying the loan at the end of the term," she explains. "It gives borrowers greater certainty over the interest they’ll pay and the future debt."

You can borrow up to 60% of your property value and the maximum term is determined by when the youngest borrower turns 95. You’ll need to demonstrate affordability and have a repayment strategy in place too; the current rate for a five-year fix is 3.90%.

Another option that’s popular with advisers is Family Building Society’s Retirement Lifestyle Booster, which runs over a 10-year term. This allows you to borrow up to 25% of the value of your property, which is then paid to you over the 10-year term as a fixed sum each month. In exchange, you pay interest each month and then clear the original loan at the end of the 10 years. Hollingworth says that as well as certainty over payments, this can suit people in the early years of retirement. "This may be worth considering if you’re looking to boost your income while you’re still fit and healthy," he explains. "At the end of the 10 years you might decide to downsize, with the sale proceeds used to clear the debt."

The choice is set to increase further still, with the Financial Conduct Authority giving the green light to retirement interest-only mortgages earlier this year. Previously lumped in with equity release products, these are now classed as standard mortgages and benefit from more relaxed lending rules. They enable older borrowers to take out a loan against their property, simply paying interest on the debt. Unlike the mortgages listed above, there isn’t a term, so the debt becomes repayable on death or earlier if required.

Mr Boulger adds: "Only the Family Building Society has signalled its intent to launch one so far, but I do expect more launches over the next year or so. As well as certainty over the future debt, where short-term fixes are used it will give borrowers access to a cheaper interest rate."

Just where interest rates are likely to be set on these products remains unknown, however. While these products could well prove popular with borrowers, one challenge is that without a fixed term, lenders may have issues around matching funding to these loans.

Other options

Although the retirement mortgage market may be set for growth, anyone wishing to tap into equity may want to look beyond the products tailored to older borrowers. "If you want to help your kids get on the property ladder, you could consider a linked mortgage where your property wealth is used to secure a better deal for your children or grandchildren," explains Ms Harle. "It can be a more straightforward option."

Among the lenders active in this market are Barclays, with its Family Springboard mortgage, and the Post Office, with its Family Link and First Start products. The mechanics vary, but with the Post Office Family Link mortgage the child takes out a 90% mortgage and then raises the other 10% with a five-year interest-free mortgage secured against your home.

Although they have historically been regarded as something of a last resort, Boulger says it’s also worth considering lifetime mortgages when weighing up the options. "Interest rates have come down significantly on these products over the last few years, now starting at around 4%," he adds. "Given that this is fixed for life, it can represent good value."

But, with so many options now available, and the choice set to become broader still, taking advice around this is a must. "What you decide to do can affect your current finances, but also the inheritance you leave your family," adds Ms Harle. "Make sure you speak to an adviser who can look at your overall financial position."

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