In an ideal world, homeowners would all have their mortgage paid off by the time of their retirement.
Today’s economic reality means that many enter the last few years of their working life with substantial mortgage debt.
Finding a suitable finance option can prove difficult for those remortgaging at the end of a fixed rate or looking to extend a mortgage beyond the normal retirement age. But lenders are now addressing the needs of these homeowners, extending eligibility criteria and offering retirement interest-only (Rio) loans alongside longer-term fixed-rate options.
It isn’t just about earned income; it can be looking at pension income, other assets or even a potential inheritance
Advisers welcome these changes but want to see more innovation.
“Traditionally, the mortgage market has been more tailored to younger borrowers; but, as the population ages, there is growing recognition of the need for options that cater to older homeowners,” says Connect Lifetime Mortgages lifetime mortgage adviser Richard Jeremiah-Clarke.
“We’ve seen developments in this area, but there is still room for improvement.”
Upper age limits
The biggest problem has been upper age limits on mortgages, says Mortgage Advice Bureau mortgages proposition director Steve Humphries.
Lenders have started to relax these, he says, but differences remain. NatWest, for example, has a maximum borrowing age of 70, HSBC’s is 75, while Halifax allows borrowing until the age of 80. In contrast, the Cambridge, Loughborough and Suffolk building societies have no upper age limit, observes Humphries.
However, higher maximum age limits do not help all older borrowers, some of whom will still fail stringent affordability tests.
There are big questions around how intergenerational mortgages could pass down through the family without carrying issues with affordability
“Many people are working longer, past traditional retirement ages,” says SPF Private Clients director Elena Todorova. “But simply stating on an application that they plan to work until the age of 75 doesn’t mean they’ll automatically qualify for a mortgage, even if this is the upper age limit.”
Much depends on the work in question, she says, with some lenders requiring a written assurance from the employer to support a mortgage application.
Todorova says brokers have an important role to play here, working with the client.
“It isn’t just about earned income; it can be looking at pension income, other assets or even a potential inheritance.”
This affordability issue means some older borrowers find themselves on a standard variable rate (SVR) at the end of their fixed-term mortgage, potentially putting further strain on their finances.
There is often a lack of suitable smaller properties, with some homeowners reluctant to go down this route due to their emotional attachment to the ‘family’ home
Marble Financial Planning equity release adviser Alan Green says: “Far too often I hear about people being on an SVR, who didn’t move when rates were low. But now that they have seen payments double or sometimes triple per month, they want to do something about it.”
There is an additional swathe of older borrowers who took out an interest-only mortgage without a separate repayment vehicle and who haven’t switched to a repayment option.
Green says figures from last year show there were 750,000 interest-only mortgages in the UK, and a further 245,000 part interest-only, part repayment mortgages. Many of these belong to older homeowners, who can find refinancing options severely limited due not only to age but to the lack of equity in their property.
For some of these homeowners a Rio may be an option, enabling them to continue servicing the loan, with the balance repaid when the property is sold, usually when the owner dies or moves into a care home.
Policies incentivising downsizing, or facilitating access to affordable housing for older individuals, could be explored
“These can be an excellent alternative to a more standard-term mortgage,” says L&C Mortgages associate director David Hollingworth. “However, the borrower clearly needs to be able to meet affordability requirements as there are monthly payments to make.”
This can be a problem for couples, he says, who need to prove affordability after the future death of one spouse, when pension income can fall significantly.
Longer-term fixes
The other innovation has been longer-term fixed-rate options (10-plus years). New lender Perenna offers a range of longer-term fixes with the key feature that
ERCs are not charged beyond an initial five-year period.
Chief executive Arjan Verbeek says Perenna is specifically targeting older borrowers and first-time buyers with these products.
“Regulations brought in following the financial crash were essential to help protect consumers, but they unintentionally impacted pensioners and first-time buyers disproportionately,” he says.
In the 10 years before retirement, how many people will know with certainty what their income and outgoings will then look like?
“Pensioners, by and large, have a stable and consistent income. This means they understand what they can afford, which is why products such as long-term fixed-rate mortgages are so important.”
Todorova says Perenna’s longer-term mortgages provide a useful solution for some older borrowers.
“There is the certainty that payments won’t increase if interest rates rise,” she says.
“This is particularly important for those borrowing into retirement who may be on a fixed income, with limited ability to cover repayment increases.
“Most people at this age are not looking to move again, but the fact there are no penalty charges after five years means there is some flexibility should circumstances change.”
Hollingworth agrees that this option will suit some older homeowners.
A Rio can be an excellent alternative to a more standard-term mortgage. However, the borrower clearly needs to be able to meet affordability requirements
“The longer-term fix means there are no concerns around rate movements that could pose an issue, and it allows for more flexible stressing of the borrowing.”
He says there are also longer-term fixed rates appearing in the Rio sector. These won’t suit all older borrowers, however.
Humphries says: “My concern would be how a customer’s income changes in retirement and the uncertainty surrounding affordability. For example, in the 10 years before retirement, how many people will know with certainty what their income and outgoings will then look like?”
Many advisers want more innovation from lenders.
As the population ages, there is growing recognition of the need for options that cater to older homeowners
“There’s still a gap in the market for products that could serve customers from middle age and into later life,” says Humphries.
“Perhaps something that could start as a standard repayment mortgage, then change to a Rio or lifetime mortgage if needed later, depending on circumstances. I appreciate from a lender’s or funder’s perspective this wouldn’t be easy, but it’s something worth considering.”
Todorova observes that, while flexible products like this are not yet available, specialist lenders such as Hodge and LiveMore are helping brokers and their clients to compare terms across these different products.
“They show what clients can borrow — for example on a standard mortgage, a Rio or a lifetime mortgage — helping them to understand these options better, and the pros and cons of different routes.”
Despite these options, for some older homeowners the only realistic path may be downsizing. Research suggests around 14% of homeowners aged over 55 plan to do this.
Far too often I hear about people being on an SVR, who didn’t move when rates were low
“While this can free up cash from property equity, the costs of moving, in terms of stamp duty and estate agent fees, can be substantial,” says Humphries.
“There is often also a lack of suitable smaller properties, with some homeowners reluctant to go down this route due to their emotional attachment to the ‘family’ home.”
Could intergenerational mortgages be a viable option for the UK, potentially providing a solution for the difficulties facing both older and younger borrowers? Such arrangements exist in other countries, notably Japan.
Hollingworth says: “There are big questions around how intergenerational mortgages could pass down through the family without carrying issues with affordability. Older borrowers already release equity to help younger generations buy a home — and may borrow to do that, rather than wait for the point when it will be inherited.
“Equally, there may be situations where older homeowners haven’t cleared the existing mortgage and need support from children to meet affordability requirements. Children could then go on the mortgage, potentially via a joint-borrower/sole-proprietor arrangement.”
Regulations brought in following the financial crash were essential to help protect consumers, but they unintentionally impacted pensioners and first-time buyers disproportionately
Humphries says, theoretically, the system could work in the UK but there needs to be careful legal and financial consideration to ensure both fairness and sustainability.
“One key issue is the potential risk to the older generation’s financial security if the younger borrower defaults on payments.”
He adds that the mortgage market in Japan is substantially different from the UK’s, with lower interest rates and LTVs, and typically 20- to 35-year fixed rates.
Political will
There are alternative potential solutions.
Jeremiah-Clarke says: “Other options might include a home equity line of credit, or HELOC, which is a second mortgage that gives access to cash based on the value of your home. Additionally, policies incentivising downsizing, or facilitating access to affordable housing for older individuals, could be explored.”
Simply stating that they plan to work until the age of 75 doesn’t mean they’ll qualify automatically for a mortgage
All of these options require political will and momentum, not just innovation from lenders. With a general election looming, could this be in the offing?
Many in the industry would like to see housing policy designed to support older homeowners, with initiatives like these potentially also helping the next generation of first-time buyers.
