Everything you need to know about senior mortgages
In 2014, the Mortgage Market Review (MMR) changed how many lenders approached providing older borrowers with mortgage products. Interestingly, providers with set age caps on lending were under debate for age discrimination, which opened up new angles with fewer limits but more criteria for borrowers to match.
Once, applying for a mortgage at 40 was seen as entering the market late. A 25-year mortgage term would take the borrower to 65-years-old, after all. Now, there’s no such limit or expectation. Instead, there are mortgage options for every eventuality and every age.
However, the MMR set its new rules to protect borrowers from entering into unaffordable agreements as their income dropped, adding pressure to making repayments while putting homes at risk.
Why bother with a mortgage at retirement age?
People are living and working longer than ever, so, for many, getting off the hamster wheel of the working world doesn’t follow the same rules it once did. For others, there’s also a necessity to release cash to help top up pensions and incomes or to provide gifts for family members and loved ones.
- Buying a new property better suited to the borrower’s needs in old age.
- Releasing capital to upgrade an existing property, allowing borrowers to stay in their forever home.
- Releasing cash to top up unsatisfactory pension schemes.
- To pay off an interest-only mortgage at the end of its term.
- To help family members and loved ones raise a deposit for their own mortgage.
What are the latest age limits for older borrowers and senior mortgages?
After the Mortgage Market Review, there are now no official age limits to mortgage provision. However, each lender is responsible for placing appropriate limits on their different mortgage products.
The latest limits tend towards 65 to 80-years-old when taking out a mortgage or between 70 and 95-years-old on completion of the term.
With that in mind, borrowers can take out a new mortgage into or approaching retirement, or over a shorter term during their working life, set to complete as their employment ends.
How to achieve approval for a mortgage as an older borrower
Providing proof of income
For many, there will be a significant fall in income at retirement. Unfortunately, that makes it much harder to achieve mortgage approval, so what can you do to better your chances?
To meet your repayments, you’ll have to prove that you’ve got the income to support them. That could take the shape of a private pension, savings schemes, stocks and share dividends, alternative income streams or profits from rental properties or other lets.
Raising a healthy deposit
Depending on the type of mortgage, borrowers may have to find a higher deposit at older ages. The lower the LTV, the better chances of approval and more competitive interest rates you’ll be offered.
Holding a high credit score
Older borrowers already present several risks to lenders, so any that can back their applications with a high credit score will fare far better than those who can’t. That said, plenty of lenders are still happy to work with adverse credit applicants, whatever their age.
Other considerations
Power of attorney – Given older borrowers could be entering the more sensitive years of life, it’s wise to have somebody lined up to make any significant financial decisions, should they become unable to themselves.
Inheritance tax – Those buying larger properties or in prime locations to retire more comfortably could take their estate over the inheritance tax limit when they eventually pass away.
What types of senior mortgages and schemes are available for older borrowers?
Mortgage extensions
Extending the term of an existing mortgage can lower payments, resulting in a little extra cash each month.
Lifetime mortgages
This equity release product allows the over-55s applicant to remain in their home until they pass away, enter long-term care, or sell the house. The borrower accrues interest on the cash they release but usually makes no payment to cover it until they reach the eventualities mentioned earlier.
Equity release schemes
These products release capital after a mortgage completes and the property is owned outright. A lifetime mortgage is one type of equity release scheme, but there are plenty of alternatives on the market.
Retirement interest-only mortgages (RIO)
Usually, for the over 50s, RIO mortgages are very similar to standard interest-only mortgages in that only the interest on the loan is paid each month. Again, the balance is paid only when the borrower dies, enters long-term care, or sells the house. Any money left over after the balance is paid passes to the beneficiaries in the borrower’s will.
Hybrid equity release mortgages
Hybrid mortgage products allow the borrower to pay all or part of the interest over a chosen period, limiting the amount of debt that can build over time.
Older People’s Shared Ownership scheme
This government-backed scheme allows borrowers to buy a portion of their home (with a maximum 75% share) while paying rent on the remainder. Once the 75% max share is acquired, the borrower ceases to pay rent.
Joint mortgages
Parents often enter into joint mortgages with their children, helping them onto the property ladder. However, in this instance, the system turns on its head, allowing the children to help their parents achieve a more appropriate or favourable home in older age—as long as they’ve got the income to cover their share of the payments.
Guarantor mortgages
Again, often utilised by parents and children, this time the child provides the security, agreeing to make the payments if the parent/parents struggle to meet their obligations.
Downsizing
By moving into a smaller or more manageable home, the borrower can reduce payments or release cash towards whatever their needs.
Taking a lump sum from your pension pot
Around the same time that the Mortgage Market Review made mortgages more accessible for older borrowers, pension rules were also relaxed, meaning that contributors could take a lump sum from their pension instead of only monthly payments. The maximum 25% tax-free sum can go a long way as a deposit or help pay off the capital of interest-only mortgages.
A mortgage broker to guide you through senior mortgages
As we age, we begin to face considerations that we’ve continually swept under the carpet of our younger years: making a will, funeral plans, senior (over-50) life insurance—all vying for part of our reduced incomes. Older borrower mortgages are just one way of freeing up a little extra capital to cover those added expenses we may face during retirement.
CLS Money is always ready to help. We can guide you straight to the best products for your situation, avoiding any unnecessary applications that adversely affect your credit score.
There isn’t anything you can’t ask our senior mortgage advisor: salary and income issues, repayment options, pension pot tie-ins, how equity release packages could work for you, and everything in between. So give us a call for a relaxed and informal chat, and we’ll do our utmost to put your mind at rest and find the best options for you and your family.
