The mortgage industry underwent an overhaul in 2015, through a process called the Mortgage Market Review, which meant borrowers over the age of 50 found it increasingly difficult to get their mortgage application approved. The Mortgage Market Review's principal purpose was to introduce safeguards to ensure lenders acted responsibly and to remove some of the risky lending practices associated with the banking crisis in 2007. In the process they made life increasingly difficult for older borrowers.
Thankfully, there are signs that the industry is becoming more accommodating to older borrowers once again. This might have something to do with our ageing population - it's been estimated that over a quarter of the population will be 65 or older by 2034. Meanwhile, Age UK, has recently highlighted that the number of people aged 100 years and over in the UK has risen by 72% over the past decade.
Lenders are now beginning to understand that older borrowers are a group large enough not to be ignored.
Why mortgages for pensioners?
There are many reasons why older people would wish to get a mortgage; a high divorce rate among people in their 50s means that many of them will be in the market for a new home. Some may wish to remortgage. And then there are those who are currently in their thirties and forties but find that the only way of getting onto the property ladder is to take a mortgage longer than the customary 25 years; a mortgage that they may find themselves repaying well into their seventies or eighties.
How many years can you get a mortgage over?
While in the past the mortgages tended to be for 25 years, now affordability dictates that clients might go for up to a 35 year-mortgage. That doesn't necessarily mean, though, that you will be stuck working into your eighties. Mortgage advisers like Jas Bola from Hillcrest Property Solutions, one of Peabodys's panel advisers, explains:
"I could sit down with a client and demonstrate to them that a 30-year mortgage is affordable and their monthly payments may be £400. Likewise, I can sit down with them and say ‘actually, you could go for the same mortgage but you will pay £350 if you go for a 35-year term’. What we could do then is to go for a two-year fixed rate because initially the client will have additional expenses like buying furniture, white goods, etc, and then remortgage after two years and shave years off. This is how longer mortgages allow extra flexibility to new buyers."
What is the maximum age for mortgages?
In general, 70-years of age seem to be the new industry standard for the top age for mortgages. There are exceptions, though. In May 2016, two lenders offered mortgages above that age: Nationwide increased it's lending age to 85 and Halifax did the same up to the age of 80.
The thing you need to remember, though, is that if you want to take out a regular mortgage up to the age of 70, you need to be willing, in principle at least, to commit to working until that same age - the lender needs to know that you will have a regular income to continue paying your mortgage. Obviously, if you manage to pay off your mortgage early, you can bring down the retirement age to the age that you want. Mortgages are not written in stone and many things can happen throughout an individual's lifetime: they might staircase to 100%, they might sell their share, or, if they start overpaying, their retirement age of 70 can be dropped to the standard age of 65.
Things to consider when taking out a mortgage in retirement
How good is your credit score?
Just as everybody else, when you apply for a mortgage, the lender will look at your credit rating so it pays to make sure that you look credit-worthy. Top 5 tips to increase your credit score include:
- Get an Experian account to keep an eye on your score (other providers include: ClearScore and Noddle).
- Make sure you make all payments on time.
- Have a credit card which you pay off regularly (borrowers like to see a history of loan repayments).
- Reduce the amount of debt you owe.
- Get listed on the Electoral Register.
How healthy are your finances?
Lenders need to know that you will be able to repay your mortgage - now and years into the future. They will want to see reliable income sources and modest outgoings. While you may not be able to do much about increasing your income, slashing your spending a couple of months before you apply is always a good idea.
What will happen to your mortgage in the event of your death?
Not a pleasant thought, but have you considered what will happen to your mortgage in the event of your death? If you've taken a joint mortgage, will your spouse or your partner be able to carry on with the mortgage repayments once you're gone? You may wish to take out life insurance or a mortgage protection insurance to safeguard your family from financial burdens adding to their grief once you've passed away.
Are you entitled to Support for Mortgage Interest (SMI)?
If you are in receipt of some benefits, you may qualify for Support for Mortgage Interest, which will help you pay the interest on your mortgage up to £100,000 if you receive Pension Credit. Alternatively you may be entitled to up to £200,000 if you receive: Income Support, Jobseeker's Allowance, income-related Employment and Support Allowance, or Universal Credit. If you receive any of the aforementioned benefits, your SMI will come in the form of a loan.
You can get more information about SMI on the government website.
Will you be able to finance care in later life?
As you grow older it is to be expected that your health may deteriorate and you may have to pay for care - either in your home or in a specialist residential facility. Being laden with debt in later life might make it particularly difficult. Also, some lifetime mortgage products (see below) may considerably eat into your equity leaving little to fund expensive care provisions.
You can find detailed information about paying for care on the Money Advice Service website.
Lifetime mortgages for pensioners
Aside from regular mortgages, discussed earlier, which are now available for longer periods and accessible up to a later age than previously, there are products designed specifically for pensioners - allowing them to live in their homes until they die or move into residential care.
What is a retirement interest-only mortgage?
The FCA defines the new retirement mortgages as 'interest-only mortgages for older consumers where, assuming there is no default, the loan is only repaid on a specified life event, usually the customer’s death or move into residential care'.
Unlike a regular mortgage, the term of a retirement interest-only mortgage is not fixed. The loan lasts until you die or move into a long-term care facility. You still will have to pay monthly interest on your mortgage but the equity itself will be paid off on the sale of your property once you die or move away. Also, your monthly repayments don't last forever - they end once the youngest person on the mortgage reaches the age of 80, or on the fifth anniversary of the loan (whichever comes first), at which stage you can opt for an interest roll-up lifetime mortgage (see below).
Just as with a regular mortgage, your ability to borrow will be assessed based on your retirement income and your expenditure, up to a maximum loan to value ratio (LTV). You also stand the risk of losing your home if you don't keep up your monthly repayments.
What is an interest roll-up lifetime mortgage?
An Interest roll-up lifetime mortgage is similar to a retirement interest-only mortgage in that the term of the loan is not fixed and gets repaid when you die or move into a long-term care facility. The difference is that you do not need to pay monthly interest on the loan. The interest, along with the equity will be paid once the property is sold. With no monthly repayments, this is a good option for people on low income.
Family inheritance and lifetime mortgage
Both, retirement interest-only mortgages and interest roll-up lifetime mortgages allow borrowers to live in their property until they die or move into specialist care facilities. In both cases, the equity (in the first case) and equity plus accrued interest (in the latter case) is paid off once the property is sold with any remaining equity in your property paid either to you or your estate.
If the property is sold when you move to a care facility, this amount can be used to pay for long-term care. This, however, might be problematic, particularly if you've opted for an interest roll-up lifetime mortgage. Depending on the duration of the mortgage, interest payments can accrue and, added to the equity, can seriously eat into the amount obtained from the sale of the house. There is a realistic risk that the final amount might not be enough to finance the necessary care for the borrower.
Also, for obvious reasons, this means that your family will not be able to inherit the property and while they will be entitled to the remaining equity once your property is sold, that amount might be very modest once the mortgage (and potentially the interest) is paid off.
Please note specialist advise is required when deciding on Equity release mortgages.