Borrowing into retirement
No matter how well you may have prepared for retirement, sometimes there is still a need to borrow money.
Applying for a mortgage in later life can be particularly challenging, even if you’ve always been financially savvy. In this guide we will outline the options and solutions available when you borrow into retirement.
Whether it is planned, or unplanned, trying to obtain a mortgage in retirement comes with it’s own unique obstacles.
Don’t worry – There are many lenders and solutions available to help you.
But pensioners and retirees will find that the options and application process is different when compared to getting a standard mortgage.
In this guide we look at what you need to be aware of as a retired homeowner, the options available to pensioners, and where to find expert mortgage advice.
Table of Contents
Later-life mortgages and equity release
The decisions you make now will have a lasting effect on your finances. To protect your situation, always take unbiased, independent financial advice before taking any action.
The lending products mentioned below require different levels of mortgage qualification. Borrowing into retirement with a standard mortgage can be conducted by a qualified mortgage adviser. But all equity release mortgage products require your adviser to hold an additional, specialist qualification.
What is borrowing into retirement?
Borrowing into retirement. or lending into retirement, is when you still have a mortgage after the age of 65.
While the UK no longer has a Default Retirement Age, the lender’s criteria will include an upper age threshold when assessing mortgage applications.
Of course, providing you have the financial means, you can decide to retire at any age.
But after reaching 65 you will see a shift in the mortgage options available to you.
Having a mortgage after the age of 65 could happen in two ways:
having a long mortgage term
Buying a home in the UK is expensive and for many borrowers having a long mortgage term helps to keep the monthly repayments down. Essentially, you are paying the money back over a longer period of time.
Where this terms finishes after your 65th birthday, then you will find that lenders will want to know about your income after age 65, as well as your income situation before 65.
For example, a borrower aged 40 takes out a mortgage over 30 years. The mortgage won’t be fully repaid until they are 70 so the lender will seek reassurance (and proof) of your ability to keep up the repayments.
applying after age 65
Once you reach the age of 65 you may not actually have a mortgage anymore. This could have been repaid many years earlier.
But circumstances change, and now there is a need to borrow a lump sum.
You are borrowing in retirement, rather than borrowing in to retirement.
You may, or may not, have any earned income from a job or profession. But the lender will want to see some evidence of your earnings, including any pensions, and how this could be maintained throughout the whole mortgage term.
Why would you need a mortgage in retirement?
Many of the reasons why people need to borrow later in life are linked to payment affordability. Some of these reasons are planned, but often it is an unforeseen problem, or a change in circumstances, that requires a different plan. The demand in mortgages for pensioners is growing, and more lenders are adapting their criteria to suit.
Rising house prices mean that higher deposits are needed. This causes some borrowers to start their property journey later in life, and for some this means borrowing for longer to keep the payments down.
repay interest only
An interest only mortgage needs to be repaid via a lump sum. Where this is not possible, extra time could be granted by extending the term into retirement.
unaffordable repayments
This could be due to an increase in interest rates, or a reduction in projected retirement income. Stretching out the term will lower the repayments, making them more affordable.
to help family
The ‘Bank of Mum and Dad‘. Releasing equity to help children, or grandchildren, onto the housing ladder.
essential repairs
Accessing some equity to undertake essential repairs on the property.
divorce
Taking out a single mortgage later in life due to a divorce and a need to purchase a home.
death
If a spouse has died but no life insurance provision has been made, then a longer term may be needed as there is now only one income.
home improvements
Improvements or adaptations that could help with mobility, in-home care or home security.
SOCIAL CARE
This could be part of a larger plan to help fund long term care for a relative, or spouse.
Why is it harder to get a mortgage?
Regardless of your age, all lenders will want to assess your income and affordability for the proposed loan.
When you are of working age, there is an assumption that you will (probably) always work full time, and maybe your income will increase over time. For pensioners who will be paying a mortgage into their 60’s or 70’s, both of these assumptions may not be accurate.
- As you get older you will probably need to work reduced hours, you may even want to.
- It’s rare for someone of pension age to have a higher income than when they were working full time.
Lenders need to abide by the FCA (Financial Conduct Authority) mortgage rules, and these always apply to mortgages that affect your main residence. This is because the act of borrowing (not paying it back actually), could put your home at risk.
Under the rules, lenders need to establish that you can afford the monthly payments over the term of the loan.
This assessment is relatively simple for someone who is already of retirement age. Your income is likely to now be quite stable and predictable.
However, for a younger borrower the situation is not so clearcut. The lender has to make some assumptions about your earning potential towards the end of the mortgage term, where you could still be making mortgage payments in your 70’s.
But in both cases they also need to consider the increasing possibility that you could fall ill or die.
Lenders are adapting
The demand for longer term marathon mortgages has increased over recent years. There is now a need for first time buyers to start with a 30-35 year mortgage term, so that the monthly repayments are affordable.
And for the same reason older borrowers are looking to longer terms that take them into the ‘retirement zone’.
With the state retirement age moving towards 70, there’s an increasing acceptance from lenders that borrowers will work up to this age. To borrow after age 70 you will need to convince the lender of your affordability from pension and investments.
Lenders work with something called Maximum Working Age (MWA). The MWA is usually around 70-75, each lender sets their own maximum, and its the upper age where they will consider your earned income when calculating the maximum mortgage.
CONTACT A MORTGAGE BROKER
If you are ready to take the next step then we can put you in touch with a fully qualified independent mortgage broker.
Lending criteria
As with any other mortgage, lenders have a set of criteria that borrowers need to meet.
The criteria is designed so that any new mortgage is acceptable for the lender and affordable for the borrower.
As individual banks and building societies each have their own needs and requirements, the criteria between them will be subtly different.
Affordability
For lending into retirement affordability is arguably the most important, and difficult area.
While income multiples are still used to calculate the maximum mortgage that someone can borrow, there is also now a requirement to look at the monthly affordability of any mortgage.
Before you begin to think about applying for a mortgage, it’s a good idea to get familiar with the likely monthly repayments. You can use an online mortgage calculator to play around with different figures and interest rates, and see how it affects the monthly payment.
The different repayment methods will also change the monthly amount. Let’s look at a quick example:
| £200,000 borrowed over 25 years at 3.50% | |
|---|---|
| REPAYMENT METHOD | MONTHLY PAYMENT |
| Interest only | £584 |
| Repayment | £1002 |
While the interest only payment might look the most attractive option, it does not provide a way of repaying the debt. So you can pay this amount every month for a year, and the amount you owe will be exactly the same.
The lender will look at your net income, after tax and national insurance, and then deduct your regular monthly payments. These will be items such as:
- Credit and loan agreements
- Food
- Utilities
- Council tax
- Insurances
- Travel expenses
- Leisure costs
- Holidays
Once these items have been deducted, the lender can then see how much you have left over for the new mortgage.
Loan to value
This is shown as a percentage figure. ie. 50% or 75% LTV.
Loan to value is the proportion of your home’s value that is taken up by the mortgage.
So a house valued at £400,000 with a £200,000 mortgage, will have a loan to value of 50%.
Lenders use LTV to manage the risk of borrowing and will always have a maximum percentage as part of their lending criteria.
Credit history
Everyone has a credit history. Each time you apply or use credit your report will be checked and updated.
Your credit score is a reflection of how well you have conducted your credit agreements over the last six years. Prospective lenders want to see that any new borrowers can manage their finances and pay their debts on time.
It’s a good idea to obtain a copy of your own credit report to see what it contains. If it is basically empty, as you haven’t needed any credit, then this is a different problem which we call having a ‘thin credit’ file.
Stress test
A mortgage stress test is a method used by lenders to determine if you can afford your mortgage payments if interest rates go up in the future.
As part of the application process, the lender might conduct a stress test to see if you could still afford your monthly mortgage payments if the interest rates were to rise by 3% after your initial fixed/tracker rate ends. The purpose of the stress test isn’t to trip you up, but rather to ensure you don’t overstretch yourself financially and end up in a difficult situation in the future. It’s also a good exercise for you to undertake yourself, to understand your own financial resilience.
However, as of 1 August 2022, this test is no longer mandatory in the UK, which means lenders may not always conduct it, but it’s still an important concept for any potential borrower to understand.
Calculating retirement income
Where you will be repaying your mortgage beyond retirement age the lender will need to assess what your income might be.
If you’re already retired and receiving your pensions, the process to assess your income is rather straightforward. The lender will typically look at your pension income, which can include state, private, and company pensions. This consistent income source is considered reliable and can be easily verified through bank statements.
But, if you’re still working and your mortgage term extends beyond your planned retirement age, the lender will need to estimate your future income as a pensioner.
This can be a bit more complex, as it’s based on projections.
They may ask for details about your retirement savings, any expected pension income, and other assets such as investment or rental income. They might also want to know about your retirement plans, such as whether you plan to downsize or have other strategies to reduce expenses after retirement.
State pension
The State Pension is a regular payment from the UK government, it’s based on your National Insurance record.
You need at least 10 qualifying years to get any State Pension and 35 qualifying years to get the full new State Pension.
defined benefit
Also known as a “final salary” pension, a defined benefit pension is a type of workplace pension. It provides a retirement income based on your salary and the length of your employment.
The amount you receive is predetermined and is based on your salary at retirement (or an average), and the number of years you’ve been a member of the scheme.
defined contribution
This is another type of workplace pension, but the retirement income you get from a defined contribution pension depends on how much has been contributed into the scheme (by you and/or your employer) and how well the investments have performed.
In other words, it’s not based on your salary or length of service. Unlike with a defined benefit pension, you carry the investment risk with a defined contribution pension.
private pension
A private pension, or personal pension, is a type of defined contribution pension for individuals. You choose the provider and then make regular payments. If you are employed, you may also arrange for your employer to contribute.
If you’re self-employed, you can set up a private pension to ensure you have funds for retirement. While private pensions can provide additional income in retirement, they also involve risk as the income depends on investment performance.
The Bank of Mum & Dad
The “Bank of Mum and Dad” and now often the “Bank of Grandma and Grandad”, is a term you might often hear, referring to the financial support parents provide to their adult children.
This support has become increasingly vital as property prices rise and younger generations find it more challenging to save for a deposit.
In recent years, more people are taking on mortgages that extend into their retirement years. This trend isn’t only due to later and higher value home purchases, but also reflects the increasing desire to assist younger family members financially.
Providing a lump sum for your children, or grandchildren, is one way of helping them.
But there are a few more:
JOINT mortgage
One way that parents can help their children get on to the property ladder is by being part of their mortgage.
Both parents and children will apply for a mortgage together. This boosts the amount a child can borrow because lenders consider everyone’s income on the application.
Guarantor mortgages
A guarantor mortgage enables a borrower to qualify for a higher mortgage amount than they could get by themselves.
You won’t be an owner of the property, but you are guaranteeing to meet any repayments that the borrower fails to make. This may enable your children to get a bigger mortgage, so that they can get on the property ladder.
joint borrower sole proprietor
A Joint Borrower Sole Proprietor (JBSP) mortgage is very similar to the guarantor option.
You will be party to the mortgage, but not the property.
The difference is that you are jointly liable, with your children, for the mortgage repayments, rather than offering a backup guarantee to pay.
springboard
This innovative mortgage allows a close family member (you) to leave money with the lender and this acts as the mortgage deposit for the property.
This enables your children to buy with a mortgage, but without the requirement to save up the cash.
With a springboard mortgage your money is kept separate and can be returned to you after a set number of years.
Other considerations
If you are planning to borrow beyond age 65 there are some non-financial matters that you should consider. They might not be relevant now but they could affect you over the coming years.
Death of a spouse
If you have a joint mortgage, the affordability will have been assessed on both of your incomes. Where one of the borrowers dies, the mortgage will still need to be paid by the surviving partner.
Work out your income situation should this actually happen and understand if there will be any widows payments and what the eligibility for these will be. You may also wish to protect the mortgage amount with life insurance, so that the debt is repaid upon death.
Mental capacity
The risk of a mental impairment increases with age. If you want to plan for the possibility of dementia or Alzheimer’s then speak to a solicitor about arranging a Lasting Power of Attorney (LPA).
The LPA will allow you to nominate someone close to you who could look after your affairs in the event that you lose mental capacity.
Inheritance
Taking out a mortgage against your home will reduce the amount of money available to your heirs. Upon death (of the last borrower), the mortgage lender will seek full repayment of the debt from your estate.
Having life insurance in place will mean that the estate value is preserved as the insurance policy pay-out should cover the mortgage liability.
What mortgage options are there?
Pensioners, or would be pensioners, do have a number of mortgage choices available.
As mentioned before, the main lending products are becoming more flexible by allowing older ages at the end of the term.
And in addition there are the specialist over 55 mortgages.
We will briefly run through them below, but you must seek professional advice before committing to a specific product or deal.
A lender’s standard range of products will be available to you, limited by the permitted maximum age.
The maximum age is gradually increasing as the demand grows for these solutions. Lenders are free to set their own terms, so there is no basic rule to go on.
Some lenders work to age 80-85, some to age 95 and a few do not have a maximum age at all.
You may also find lenders that have some more specialised products, directly aimed at older borrowers.
RIO stands for Retirement Interest Only mortgages.
These are a type of mortgage designed for older borrowers, typically those who are approaching retirement or already retired.
Here are the main features of RIO mortgages:
- Interest Only: As the name suggests, RIO mortgages are interest only, you only pay the interest on the loan each month. This means that your monthly payments are lower than they would be with a standard repayment mortgage, where you pay back both the interest and the principal (the original amount borrowed).
- No Set End Date: Unlike standard mortgages, RIO mortgages don’t have a set end date, and no maximum age. Instead, they’re designed to be paid off when a specific life event occurs, such as selling your home, moving into long-term care, or upon your death.
- Affordability Checks: Lenders will carry out affordability checks to ensure that you can afford the monthly interest payments from your income in retirement. This is typically from pensions, investments, and savings.
- Property as Repayment: The capital (original amount borrowed) is repaid when the property is sold. This happens when the borrower sells their home, moves into care, or dies.
- Loan-to-Value (LTV): The amount you can borrow with a RIO mortgage typically depends on the value of your home, your age, and your income. Lenders will have different criteria, but many will lend up to around 60% of the property’s value.
The minimum age for most equity release mortgages is 55.
They will allow you to borrow against the equity in your property, without the need to make any monthly payments. The debt is repaid when the house is sold, when you move into a care home or on death.
The Complete Guide to Equity Release
There are two types of equity release plan:
A lifetime mortgage is the most popular type of equity release.
It is an interest only mortgage, with no repayments and no set term. The interest due is added to the mortgage balance, which increases the amount you owe. The debt is repaid when the house is sold, when you move into a care home or on death.
As the original debt will grow, because of the added interest, the initial loan to value will be relatively small.
A home reversion plan is another type of equity release, but it is not a mortgage.
With this plan you will sell some, or all, of your property to the home reversion provider. In return you will receive a lump sum and/or a regular income.
You will have the right to remain in your home until you die or need full-time residential care.
Borrowing into retirement
Applying for a mortgage in later life can be particularly challenging. In this guide we will outline the options and solutions available when you borrow into retirement.
Equity Release Guide
Over 55? Our complete guide to unlocking the cash from your home using an equity release plan.
Mortgage Broker Guide
In this guide we’ll take a look at what mortgage brokers do, how they can help you, how they get paid plus tips on how to find a good one.
How to improve your chances
Anyone can improve their chances of being accepted for a mortgage, no matter what their age. Forward planning can be your friend and help you to get financially organised and ‘mortgage ready‘.
Lenders need to see that you can afford the repayments for the full duration of the mortgage. So it will be helpful if you can make this as easy as possible for them by collating paperwork and information ahead of applying for your mortgage.
credit status
Your credit status is extremely important, it shows how you have managed your credit accounts over the last six years. Obtain a copy of your credit report and make sure everything looks correct.
proof of income
This will be proof of your current income, and proof of any future pension income during the mortgage term. Lender’s will be looking for official paperwork, projections and statements.
loan to value
The amount of deposit, or equity, you have directly affects the loan to value percentage. Try to keep the LTV as low as possible, saving up for a higher deposit or paying off other debts will help.
get some help
Trying to get all of this done can seem overwhelming. If you have family members, ask them if they can help. Speaking with a mortgage broker at this stage would also be helpful and they can set out a ‘roadmap’ of items that are needed and a timeframe.
Mortgage advice
While it is possible to do all of this by yourself, it will be easier if you allow an independent mortgage broker to help you.
As well as bringing together all of the information and paperwork, there is the need to seek out the best lender. This can be difficult if you are unfamiliar with all of the different banks and which ones accept older borrowers.
A broker can help you with both.
Information
In terms of information, your broker can advise you of what is necessary, and why it is needed. They will also establish what financial data you will need to show, to get accepted for the desired mortgage amount.
Brokers can also plan ahead for you and help with any queries that arise out of your credit report.
Research
Whole of market mortgage brokers will have access to over 100 different mortgage lenders.
And each one has their own set of criteria and range of products.
For an experienced broker, this is not a problem. They will be able to search through these lenders and identify the ones that may be suitable for you. This gives you a huge amount of choice.
Lending into retirement is not something a computer can be trusted with! Your mortgage broker will then speak with the lender’s shortlisted to check their criteria for your specific situation. This provides peace of mind and avoids the need to formally apply to different lenders.
Once you are happy to proceed, the broker will help with the application process, and stay with you until the mortgage starts.
Ready to explore your options?
If you’re on the cusp of starting your mortgage journey and could use the guiding hand of a professional, don’t hesitate to reach out to a reputable mortgage broker.
They will make the process smoother and more profitable than going it alone. And remember, knowledge is power.
The more you know, the better decisions you can make. Keep reading, keep asking questions, and keep moving forward on your journey.
Find a mortgage broker
FREQUENTLY ASKED QUESTIONS
What is the maximum age for a mortgage?
This depends on the lender, as they are free to set their own rules. Some need the loan repaid by age 80/85. Others the maximum age is 95 and a few have no maximum.
Can you get a mortgage near to retirement?
Yes, there will be several options available. The lender will need to assess the affordability based on your income now and when you retire. Where your predicted retirement income is much lower than now, the lender may need you to have a shorter mortgage term.
Can you get a mortgage if you are already retired?
Yes you can. Affordability still needs to be assessed but is quite straightforward once you are in receipt of your pension income.
Can you get a mortgage on a pension?
Yes this is possible. Again, you need to pass the mortgage affordability tests. Your income can include pension income and any other part time work.
What is lending into retirement?
“Lending into retirement” refers to a mortgage, that will extend into a borrower’s retirement years. Traditionally, mortgage lenders preferred that mortgages were fully repaid by the time borrowers reached retirement age. However, changing demographic and economic trends have led many lenders to become more flexible. People are living and staying active longer, and retirement income sources can be quite diverse, including pensions, investments, rental income, or even part-time work.
What issues are associated with borrowing into retirement?
Borrowing into retirement may pose challenges due to income reduction and the uncertainty of lifespan. Unforeseen expenses and interest accumulation can strain finances, while home equity may be depleted if the loan is secured against it. This could also limit financial flexibility in retirement.
What is the default retirement age?
Your employer cannot force you to retire at any age. Employers used to be able to get workers to retire at 65 (known as the Default Retirement Age), but this law was scrapped in April 2011. In respect of mortgages, age 65 is still used as a benchmark for retirement.
Are remortgages available?
Yes. A remortgage is when you switch your mortgage over to a new lender. This is often to take advantage of a better interest rate. But it could also be used to gain access to a different lender who offers the ability to borrow into your retirement years.
