Lending options for older borrowers improve
The good news is a handful of smaller lenders are waking up to the fact that older borrowers are not necessarily high risk and there is an increasing range of options for this demographic.
According to figures from the Council of Mortgage Lenders (CML), more than a third of mortgages taken out today will run beyond the borrower’s 65th birthday.
There are a number of reasons why more people are borrowing into retirement. Firstly, rising house prices mean people are getting onto the property ladder at an older age than a decade ago.
According to the Mortgage Advice Bureau, the average first-time buyer is now aged 37 which means they would be 62 when they paid off a typical 25-year mortgage. Meanwhile Halifax has reported that a quarter of first-time buyers are opting for a 35-year mortgage term rather than the traditional 25 years. Someone buying a property aged 35 with a 35-year mortgage term would be 70 by the time they were mortgage-free
For other people, divorce will result in a need to either borrow money to buy a home or to buy their ex-spouse out of the marital home.
Another issue is that interest-only borrowers in their 50s and 60s may find their repayment vehicle or endowment is inadequate and so they need to borrow more money as they approach retirement.
Yet despite there being increasing demand for mortgage finance in later life, many mortgage lenders are not keen on lending to the older age group.
One of the main reasons for this is a new set of rules for mortgage lenders laid down by the Financial Conduct Authority in April 2014. The Mortgage Market Review (MMR) aimed to clamp down on risky lending and has made it more difficult for anyone to be accepted for a mortgage.
The MMR means enhanced affordability checks for all borrowers with lenders needing to be satisfied that the mortgage can be serviced both now and in the future.
“Lenders have all interpreted the stricter lending criteria laid down by regulators in different ways, resulting in inconsistent underwriting decisions across the industry and a much stricter view on lending for anybody who’s loan stretches beyond their retirement age,” explains Simon Tyler of Tyler Mortgage Management. “One of the hardest hurdles is that many lenders insist that you are able to meet your current repayments on your projected retirement income. So you aren’t given the luxury of inflation effectively reducing the debt over the next 10 or 20 years and then meeting repayments from retirement income, you must be able to show that you can meet those initial repayments in retirement from the outset. That has proved tough for many people.”
Tyler says the irony is that people in receipt of a decent pension are among the safest customers because, unlike employed applicants, they cannot be made redundant and lose their income.
His opinion is shared by many in the mortgage industry. The Building Societies Association (BSA) has said the mortgage market needs to change to cater for older borrowers, while over 50s specialist Saga says it regularly hears from people who are stuck on uncompetitive mortgages because an arbitrary age limit prohibits their move to a better deal.
For example, April 2015 saw a couple in their 40s take a case to the Financial Ombudsman Service (FOS) when HSBC rejected their mortgage application on grounds of age. In the first case of its kind, the bank turned down the mortgage application because the husband would have been over 65 when the 18-year deal finished.
Yet his final salary pension was large enough to cover the repayments and his wife also had adequate income to repay the loan on her own. The FOS said HSBC had acted unfairly, ordered the bank to pay £500 to the couple for ‘distress and inconvenience’ and told it to reconsider the application.
A BSA study entitled ‘Lending into Retirement: Interim Report’, published in November 2015, found the majority of the building society sector would only lend up to the age of 75 irrelevant of circumstances or ability to pay. Perhaps more worrying is the fact that this age limit is higher than most high street banks, making building societies the best bet for older borrowers.
Case by case
Building societies tend to consider applications on a case-by-case basis and be more flexible. Several societies have recently changed their policies.
Dudley Building Society, for example, recently received national press attention when it scrapped upper age limits across the society’s whole product range. The society says it considers ‘all borrowers to be equally worthy of consideration’ and ‘does not discriminate by age’.
Jonathan Harris, director of mortgage broker Anderson Harris, says there are several smaller building societies and challenger banks who are looking to make headway in this market.
“National Counties Building Society, for example, will lend to borrowers up to over 90-years-old if they can demonstrate that they can afford the mortgage. It will also allow several applicants on the application, so younger people can use their income to help out parents if required or vice versa,” he says. “Furness Building Society will also look at these deals, as will Harpenden Building Society.”
Harris also pointed to Metro Bank’s approach to lending to older borrowers where their income is guaranteed – such as a good final salary pension or a rental income – as a key change.
“Metro entering the market is significant, as it offers these deals at market-leading rates, whereas the smaller building societies are looking to charge a premium on the rate,” he explains.
Other mainstream lenders such as Santander, Barclays and Halifax often won’t consider older borrowers at all. Using a broker can be a great way of finding a lender who will consider your application – a broker will know which lenders are happy to lend to certain demographic groups.
Tyler claims his broking firm has never failed to get a ‘reasonable case’ of older borrowing through, with one lender or another.
“Yes, it has become harder work, but it is down to having good relationships with reasonable underwriters, being able to compile a complete and compelling argument, and knowing what boxes to tick to please the appropriate lender,” he says. “While the person in the street will find this arduous – not to say almost impossible – I am happy to say we have been receiving many referrals in this area because of our success in getting these deals through.”
In some cases another type of financial product might be more appropriate for older borrowers than a mainstream mortgage.
Existing homeowners struggling to remortgage past the age of 65 might want to consider equity release. This involves borrowing a lump sum against the equity in your home which is repaid when you sell your home or die.
Alternatively, home reversion plans involve selling a percentage of your property in exchange for a cash lump sum while retaining the right to live in your home rent-free.
It’s important to get independent professional advice before taking an equity release or home reversion product and understand the impact any plan will have on the inheritance you’ll be able to leave.
Another option is a secured loan against your property. Shawbrook Bank has a partnership with secured loan broker vs Loans which offers a solution for older borrowers turned down for a remortgage by mainstream lenders. But, as with equity release, you’ll need adequate equity for a secured loan to be an option.