As an ageing population, alongside having enough money to live comfortably and the essentials like healthcare, a major consideration will be where and how we’ll live in our later years.
Much will naturally depend on your own circumstances. For example, if you’re a homeowner that has accumulated equity over time, there’s usually not too much to be concerned about – especially if you’re looking to downsize. Provided you have lived in your home exclusively, you can buy a new property and pull out the surplus tax-free money to fund your pension pot, pass on to your children or do whatever you wish.
But what if you’re not in this situation and you would like to take out a mortgage?
Say, for example, you don’t have much equity and want to buy another property that better accommodates your needs as you grow older. You may need to top up a pot of cash to supplement your pension income or gift money to a loved one. Or it may be as a simple as needing to remortgage to take advantage of the favourable rates that are currently available.
Although you’re by no means excluded from accessing mortgage finance, the challenge is that lenders’ models are based on where a borrower’s salary lies (amongst other factors). They will therefore want to see that mortgage will be adequately serviced throughout its term – i.e. after you stop working – from your pension and/or other savings.
Where to start?
Remember, just because you may be considered as a ‘niche’ borrower, it doesn’t mean that you won’t be able to access competitive mortgage rates.
Even so, there are a number of steps you can take to position to yourself in the best way.
Your first port of call should be to find a good mortgage broker who would typically have close working relationships with lenders and, quite possibly, the underwriters (the people that ultimately make the decision to lend).
Before making any application, make sure your credit history is intact. Also note that the mortgage market these days is governed by very strict rules (following the Mortgage Market Review in 2014). Lenders will look at your ability to pay from the very start to the end of the loan – not just your current position.
Crucially, the lender will also want to see that you will have enough disposable income to cover the mortgage repayments. This will usually involve providing evidence of company pension forecasts, annuity and/or bank statements as well as your state pension confirmation. If you’re still working but plan to borrow into your retirement years, the lenders will want to see recent income statements.
For this reason, you will be required to provide evidence of your expected retirement date (assuming you are still working); the value of your pension pot and the level of income you anticipate receiving (proof will be required for both latter requirements). Each lender has its own criteria based on how far into your retirement years it’s willing to stretch to (when the debt will be repaid).
Types of mortgages
There isn’t one specific type of mortgage for those who are retired as every borrower has different circumstances and requirements.
Borrowing on a fixed rate basis may make sense as you can comfortably budget what your monthly mortgage outgoings will be. There are also tracker, discount and offset mortgages that may be worth exploring.
Specific retirement interest only (RIO) mortgages are another potentially worthwhile option. You can borrow against your property and only pay back the interest. The loan is then repaid when you sell up, move into a retirement / care home or pass away. The benefit of this type of loan is that the affordability requirements are less onerous. Note that it’s also possible to combine interest and repayment elements.
Equity release schemes
If you’re planning to stay in your home, you may want to consider using an equity release scheme.
Through a lifetime mortgage, for example, you borrow a share of your property’s overall value and get charged interest on that amount. This is not paid back monthly like a normal mortgage but rolled up into one lump sum payment – due if you choose to sell your property or when you die.
Alternatively, using home reversion scheme means that you sell a share of your property to the mortgage company for below its market value. You can then remain in your property for as long as you need. If you then go into care, sell the property or die, the mortgage company gets an equal share of the value it sells for as repayment. For instance, if you sold 50% of your property to the mortgage company, it will be entitled to receive 50% of the eventual sale price.
Final note …
Expect this marketplace to evolve and present a wider range of options in the coming years, especially as more of the population reaches retirement age.
It’s worth remembering that the same rules as any other form of mainstream finance apply with retirement mortgages and do not expect to get any special treatment.
Your home is at risk. Whilst lenders these days are extra vigilant, you will still be held responsible if anything goes wrong. Repossession is something nobody wants to go through, so it’s important to carefully think about various ‘pressure-tested’ scenarios that could arise.
About the author
Ruban Selvanayagam has been a professional landlord for over 13 years, primarily operating across the East Midlands. He is also co-director of Property Solvers, a fast house buying company and express estate agency.Last modified: May 8, 2019