Borrowing into retirement: What are the options?

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As lifestyles change an increasing number of people are looking to borrow into retirement. Stephen Little looks at how lenders have reviewed their age limits in response to growing consumer demand

For many people looking for a mortgage that lends into retirement, securing finance can often be tricky.

The population is ageing and an increasing number of people nearing retirement or already retired are looking to borrow in order to purchase a property or to fund their lifestyles.

However, older borrowers need to be able to prove to lenders they have the income to afford loans, which is not certain once they retire and many have hit a brick wall.

Tougher regulation measures such as the Mortgage Market Review, which was introduced in 2014 and brought in stricter affordability checks, have also made it more difficult for older borrowers to get a mortgage as lenders do not want to be seen as acting irresponsibly.

Rising house prices and deposits mean people are increasingly buying a property later in life and will also need to borrow for longer.

Recent research from Halifax found that delays in getting onto the housing ladder are leading to increasing worries about retirement for many, with one in three people aged 25 to 45 still expecting to be paying off their mortgage in their sixties.

This problem has been exacerbated by lenders, many of which have been reluctant to lend to older borrowers and have only been prepared to grant a mortgage up to an individual’s planned or state retirement date. This has left people in their 40s and 50s wanting to borrow past this point struggling to get a loan.

Help for is at hand though. Many building societies have pledged to review their maximum age limits for mortgage borrowers to help support those needing mortgage finance heading into retirement.

Last November, the Building Societies Association (BSA) launched a year-long review into lending into retirement to help older people get a mortgage.

Paul Broadhead, head of mortgage policy at the BSA, said: “Financial services have got to evolve to meet consumer demand. People buying later and borrowing longer need more opportunity to get mortgages over the terms they need so they can purchase the appropriate property for their circumstances. People used to just take out a mortgage to buy a home and then paid it off before retirement, but that does not necessarily happen anymore.”

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Age limits

According to the BSA, 27 building societies will now lend up to 80, 85 or have no maximum age limit.

The Cambridge Building Society and Dudley Building Society were two of the first lenders to remove upper age limits on their mortgage products. Regardless of age, customers that are able to meet the repayment criteria will be considered for a mortgage.

Dudley Building Society removed its upper age limits across its whole range after seeing an increasing number of older borrowers who had been rejected by their bank.

Jeremy Wood, chief executive of the Dudley Building Society, said: “A large proportion of the people who approach us have been declined by their bank. It seems quite extraordinary that someone with an unblemished track record is then denied credit by a lender.

“We find a lot of people that are self-employed are looking to borrow later in life, but can’t find mortgage credit. 

“We also receive enquiries from people who want to find ways of releasing equity from their properties to pass onto their children.”

Since scrapping its maximum age limit in January, The Cambridge Building Society has agreed over 30 mortgages, totalling £4.5 million, where the borrower will be over 75 at the end of the mortgage term.

Tracy Simpson, head of lending at The Cambridge Building Society, said that underwriters make assessments based on current and future incomes to judge affordability. Supporting evidence can include pension projections and investments.

“A majority of our customers who have benefited are in their 60s who were coming to the end of their deal with a lender that had fixed upper age limits. Our main aim is to ensure whatever the mortgage term, it is affordable for the people taking it out.”

With most mortgages having a 25 to 30-year term, first-time buyers in their 40s can struggle to get a mortgage as many lenders see them as a riskier proposition once they are no longer earning past the retirement age.

Simpson said: “For people in their 40s we will assess their income, when they are likely to retire and then explore with them what sort of pension arrangements they have got to determine if they have a credible income past their retirement age to support the mortgage.”

shutterstock_97921958Is lending to older people riskier?

“We don’t see lending to older people as riskier,” said Wood. “The risks are different. It is not that older people are at any greater risk of defaulting on their mortgage payments, but there are things that have to be taken account of such as illness.”

The BSA argues that the building society sector offers greater flexibility and more options than banks for those looking to borrow into retirement.

Broadhead said: “The main myth is that the mortgage market is closed to people over the age of 40 or 50 and that is what we need to get away from. People are not too old to take out mortgages if they can afford it and they have the income and a good credit record. It’s rare now that somebody works all their life and comes to a complete stop. They should be able to get access to the mortgage market irrespective of their age.”

Warning

Critics argue that some borrowers may have problems paying back their loans once they reach retirement age.

Gill Davidson, group regulatory director at Tenet Group, said the key problem for lenders as more consumers borrow into retirement was affordability.

“The challenge is very simple. Will such mortgages be affordable? Not now but in the future. At some point interest rates will rise,” Davidson said.

Pension freedoms were introduced in April last year and allow anyone over the age of 55 to take some, or all of their pension, as a lump sum through drawdown, with the first 25% paid tax free.

She said that the pension reforms could have a huge impact on the ability of older borrowers to repay their loans.

“Pension freedoms providing access to pension pots for those aged 55 enabled people still working to access their retirement savings. It could be for home improvements or to reduce debts. But whatever use it is put to, withdrawing pension savings for anything other than investment may affect the ability to pay an outstanding mortgage.”

Davidson said that education on the impact of borrowing for customers is an area in need of development.

“We need to understand the personal and financial circumstances of customers and what their mortgage needs may be,” she said.

She suggested that lenders develop guidance materials for consumers and online cash flow tools to help them assess their ability to repay.

Equity release

More people than ever before are looking to borrow in retirement to help fulfil their lifelong ambitions and dreams. These can range from home improvements, a holiday abroad or helping grandchildren with a deposit for a house.

Since the introduction of the Mortgage Market Review (MMR), many firms have tightened their retirement mortgage lending criteria, especially for pensioners and those nearing retirement age, significantly impacting their ability to borrow.

One possible solution for those that can’t get a loan is equity release, which allows you to gain access to the wealth tied up in your property without having to sell or move home. It is designed for older homeowners who own their property outright or have relatively small mortgages to pay.

You can borrow against the value of your home, sell it or part-exchange it for a lump sum or a regular monthly income.

A lifetime mortgage is a type of equity release which you can use to extract your funds in a single lump sum or in smaller amounts over time through what is known as drawdown. Alternatively, home reversion plans allow you to access all or part of the value of your property while retaining the right to remain in it rent free.

Dean Mirfin, technical director at Key Retirement, said: “The affordability criteria required under MMR does not go away and that is why equity release for a lot of people provides an alternative.

“We see a lot of people looking to raise funds for numerous purposes because they simply cannot borrow through other means.

“We don’t just see consumers who are struggling to get mortgage finance, but those struggling to get any type of finance at all.

“In particular there is huge growth in people coming to us who want to raise money on their homes to give some money to their children as well.”

Mirfin said that there has been a boom in the equity release market, driven by falling interest rates and the introduction of pension freedoms in 2015.

According to the trade body, the Equity Release Council, equity release lending went up 16% last year to £1.61 billion. More than 22,500 new plans were agreed in 2015, the highest number since 2008.

Mirfin said: “You are talking about an environment now where customers can get a rate below 5% fixed for life. Whereas 10 years ago this rate would have been 7%, so the cost of borrowing has come down dramatically. Alongside that you have much greater flexibility within the products.”

Lifetime mortgage boom

Bernie Hickman, chief executive of Legal & General Home Finance, predicts a boom in the later life lending market.

He said: “We have had mind-boggling increases in housing equity. For many people it’s the biggest asset they never think about using, unless they are downsizing.

“This is where a lifetime mortgage comes in. We have seen changing attitudes from our customers which has led us to believe this is going to be an increasingly popular market.”

Hickman said that customers were using lifetime mortgages for a whole range of things, from home improvements to paying off debt and clearing mortgages.

“It’s a way to access the money tied up in your property and you are safe in the knowledge you will never have to move out of your house. It’s still your house and you just owe money secured against it.”

He also said there was a changing attitude towards legacy.

“It wasn’t that long ago that the whole focus for people was leaving their house to their family. That’s a wonderful thing to do, but how about helping them out sooner when they need it?

“There are also people who have put their children through university and are now thinking about how they can spend the wealth tied up in their property.”

Case study: Taking out a mortgage in retirement

David and Gill Eldridge took out a 20-year interest-only mortgage earlier this year with The Cambridge Building Society.

Both retired and in their 70s, they have lived in Cambridge for the last 35 years.
David says: “We were thinking about selling our house and downsizing, but we couldn’t really find anything that we wanted.

“We didn’t have to move, so early this year we explored the possibility of taking out an interest-only mortgage.”
He said that they decided to go to The Cambridge Building Society after reading in the press that some building societies were willing to lend to older people.

After speaking to an adviser and giving the building society details of their pension income and outgoings to assess affordability, they decided to borrow £150,000.

David says: “We need it for home improvements, a new car and to support our lifestyle for things like holidays. Within the home we’ll use it for things like furniture, including sofas, beds carpets and curtains. We will also have funds for high days and holidays.

“I’d absolutely recommend it to other people – taking out a mortgage was very easy. I am glad lenders have reviewed their age limits as there are a lot of people in the UK who are sitting on good equities and are asset rich but cash poor.”

While an interest-only mortgage gives you cheaper repayments, you are not actually paying back any of the debt. Each month you only pay back the interest on the loan during the term of the mortgage. The capital on the debt owed is paid back in full at the end of mortgage term.

David says: “The interest-only mortgage appealed as our house will continue to appreciate in value. And as long as we meet the interest costs we are not going to pay any more. It’s not as if we are eating into the equity of our property as you would under an equity release loan.”

“Our daughters, who will inherit our assets, will be protected to a large extent and if we want to downsize in 10 years or go to another property we can take the mortgage with us.”

Interest-only maturities

Around 600,000 homeowners will see their interest-only mortgages mature by 2020, potentially forcing them to downsize in order to repay the original capital.

With the first wave of maturities this year, Mirfin said that equity release offered them the opportunity to repay their loans.

Mirfin said: “People could be forced to sell their homes or face repossession. Some are quite happy to downsize and sell up and pay off the loan, but for those that want to keep their homes, equity release is a solution.

“Unfortunately, people are selling their homes when they don’t need to because they haven’t been told about equity release from their bank.”

Disadvantages

While equity release can be a good way of getting access to money, there are some drawbacks.

Equity release can be more expensive than a traditional mortgage as you could be charged a higher rate of interest depending on the plan you choose. You may also face charges if you are looking to pay back your money earlier than originally intended.

If you take out a home reversion plan you could also get a far lower value for your home than selling it on the open market. Equity release can also drain your home of its value leaving little left for your children to inherit or to use for care fees. The money you receive may also affect entitlement to state benefits.

Rachel Springall, finance expert at Moneyfacts.co.uk, said: “Borrowers would be wise to digest any independent advice before entering any arrangement as interest rates on these loans can vary considerably and there are also set up fees to pay too.

“The interest on lifetime mortgages is rolled up or compounded over the duration of the loan, which means the debt will increase the longer the debt is maintained.Property prices can fall as well as rise, so borrowers need to feel confident they can pay the loan back at the end of their lifetime or by selling their home.”

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