If you’re in retirement and have mortgage debt, research indicates it can be far more challenging to secure a mortgage. You may be forced to pay higher interest rates without a new deal, placing further pressure on your finances. Ian Potter, Principal Mortgage and Equity Release Adviser at Pembroke Financial Services, explains what the options are.
It’s not uncommon to still be paying off a mortgage after retirement. And as the average age of first-time buyers is gradually rising, it’s a trend that’s expected to continue. In fact, in 2018, around a fifth of UK homeowners expected they’d still be paying off their mortgage once they retired. It’s important you consider this additional cost in retirement plans, but it doesn’t have to mean you can’t reach your goals.
However, research suggests that older homeowners are struggling to secure a new deal once their existing one runs out. This lack of choice can mean they’re stuck paying higher interest rates. Eight in ten borrowers over 55 that expect to be able to renew their mortgage are being turned down, according to a study from Retirement Mortgage Service.
When an existing mortgage runs out, you’re usually moved on to your lender’s Standard Variable Rate (SVR). This typically isn’t competitive and means more money going on interest payments.
Why are older homeowners being turned down?
If you’ve met all previous mortgage repayments, it can be frustrating to now face rejection by lenders.
Ian commented: “The reason behind it is likely to be down to a combination of factors. First, lenders will set their own criteria on how old a borrower can be and when they need to pay mortgage debt by. Second, lenders must carry out affordability tests. As your income may have reduced since retiring, this may play a role.
“With this in mind, it’s important to do some research and get your paperwork in order before approaching a lender.”
Applying to a lender will leave a mark on your credit report. Applying for several mortgages or other forms of lending in quick succession can be a red flag to other providers. Making sure you meet the individual criteria and you have all the necessary paperwork to show income and expenditure, for instance, can help you secure a deal.
There are thousands of mortgage deals on the market and it can be difficult to understand the criteria of each. This is where a mortgage broker can help.
What should you do if you’re struggling to secure a traditional mortgage?
“If you’re on your lender’s SVR but don’t have long remaining on your mortgage, it may make sense to continue on this rate. Often when you’re on the SVR, you’re able to make overpayments without incurring additional penalties. As a result, if you’re in a position to pay off the remaining debt quicker, this may be an attractive option,” Ian said.
“If you’ve longer remaining until your mortgage is repaid or your current deal is an interest-only mortgage, there are other options to explore too.”
In the past, older homeowners that couldn’t secure a traditional repayment mortgage may have had to sell their property. However, recognising the challenges many are facing, there are alternatives now available. You may want to consider these two options.
1. Interest-only retirement mortgage
If affordability is a problem when securing a traditional mortgage, this may be a solution.
Ian explains: “You’ll only need to prove that you can afford monthly interest payments on the amount owed, rather than repaying the debt too. Instead of reducing the debt through regular payments, the loan is paid off when you die, move into long-term care or sell the property. You can usually make additional payments to reduce the amount owed too.”
2. Lifetime mortgage
Ian continued: “A lifetime mortgage is a type of Equity Release product. This is where you unlock property wealth by taking out a loan secured against your home. Rather than making any payments to reduce the debt, a lifetime mortgage is paid when you die or move into long-term care. Interest payments aren’t typically made. Instead, interest is rolled up and would be payable at the same time as the remaining debt.”
If you have existing mortgage debt remaining, you must pay this off using the money released. This can reduce your outgoings but will have an impact on the value of your estate.
Which option is right for you?
There’s no ‘right’ or ‘wrong’ solution, but it’s important to understand what they would mean financially in the short and long term. You need to consider your current income, how this will change throughout retirement, the inheritance you want to leave loved ones and other factors. If you’re struggling to secure a traditional mortgage in retirement and want to explore other options, we’re here to help. Please get in touch to discuss what the options would mean for your plans.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Equity Release will reduce the value of your estate and can affect your eligibility for means-tested benefits.