Although many pensioners are eligible for a mortgage in retirement, many are not even considering this as an option, or even aware they could apply for one.
Equity release can be a final solution for borrowing in retirement once all other potential avenues of capital raising have been explored, however equity release can be expensive & sold all too quickly without looking at the alternatives. It is a common misrepresentation that just because people are near to, or in retirement, that they cannot raise funds via a conventional mortgage.
This is grossly incorrect.
As part of any capital raising initiative, all options must be considered & eliminated as necessary upon discussion between client & adviser. By ascertaining disposable income & the clients future intentions with regards to their property, occupation & selected retirement date the adviser can provide recommendations accordingly.
There are two ways that lenders will look at potential mortgage cases: – pre retirement & post retirement income: -
Should one still be working, most lenders will consider employment income only up to a maximum age of 65. The amount that could be borrowed would be based on a multiple of income which varies from lender to lender. It can also be based on affordability, taking into account gross incomes & making deductions for any loans, credit cards or other outstanding debt.
However, how does this affect people considering working beyond normal retirement age of 65? Not to worry, as there are still a few lenders that would permit this & this is where specialist independent mortgage advice should be sought.
For example Leeds Building Society will take into account current employment income into retirement should they be aged under 60, regardless of the normal state pension age. Leeds will actually permit the mortgage term to extend into retirement up to a maximum age of 80. The Leeds Retirement Plan must have a minimum term of 5 years and have commenced before the age of 70. For joint applicants this would apply to the oldest applicant, not like equity release which bases it on the youngest applicant. Further constraints have now been placed on the Leeds Retirement Plan product in that the maximum loan-to-value must be 50% and following the release there must still be £150,000 equity remaining in the property.
It must be stressed to the client however that payments must be maintained & this could be difficult should employment cease prior to the end of the selected mortgage term. However, for some this could certainly be an option should their future pension income still be substantial.
For many lenders though, should the mortgage term extend beyond age 65, then only post retirement income will be considered. This could be income such as a state pension, company & private pensions & some disability benefits etc which are not reliant on employment.
However, due to the lower levels of income at retirement age, this would result in reduced borrowing power into retirement & consequently smaller mortgages. Dependent upon age, the mortgage term would be determined by the maximum age at expiry of the mortgage. Again, many lenders cautiously use 75 as the maximum expiry age. Should the lender only permit a capital & repayment mortgage, due to the short term this could be expensive.
Therefore, an interest only mortgage could be an alternative if the loan to value is below 75%. Again, access to specialist advice can result in finding lenders that can potential lend beyond age 75 & also on an interest only mortgage basis. Should adequate pension provision have been made, then lenders acknowledging this are available & will lend beyond age 75. Leeds Building Society, Godiva & Halifax’s Retirement Home Plan will fit the bill here. All three will lend to a minimum age of 85 & in the case of Halifax they will extend to a term of 40 years; more than sufficient for most!
Therefore, before rushing into borrowing in retirement, bear in mind that yes, equity release is an option, howoever is it the best option for everyone? Probably not & as surprisingly advised to some of my retired clients, (pleasing most as a result) they could be too YOUNG for an equity release! Therefore, consider the affordability of a mortgage first, as it could be a lot less costly for your beneficiaries than an equity release plan.
For further details on mortgages in retirement & to check eligibility please contact Mark on 0800 678 5159 or email [email protected].