Mortgage lenders are making it easier for customers to borrow into their 70s and 80s after bowing to pressure to ease restrictions on older homeowners.
Nationwide Building Society and the Halifax have both announced higher age limits on their mortgages since the start of May and others are expected to follow suit over the coming weeks.
The Nationwide has raised its maximum age of “mortgage maturity” by a decade to 85 in a move that will take effect in July. The Halifax announced a week earlier that it was raising its maturity limit to 80, as of last Monday.
But while the announcements have been widely welcomed, there are concerns over the implications of borrowing deep into retirement. The changes may also cause greater complexity, particularly when it comes to the way different lenders treat pension income.
The industry has been under pressure from groups including the Council of Mortgage Lenders (CML) and the Building Societies Association (BSA) to do more to help older borrowers.
Research by the BSA found that half of people aged 25 to 34 now believe they’ll need a long-term mortgage that they’ll still be paying off in retirement. It noted that those aged 65 or over will account for around a quarter of the UK population within 20 years.
But the restrictions on older borrowers have tightened even as life expectancy has increased. The proportion of loans accounted for by borrowers over the age of 65 has fallen dramatically over the past decade, as lenders have become more cautious and rule changes have sharpened their focus on affordability. Those rules came in the form of the mortgage market review (MMR), which took effect two years ago and resulted in borrowers being turned down for mortgages if their term extended even a few days past their normal retirement date.
Most building societies who have continued to advance mortgages stretching into the borrower’s 80s or so have no age limit at all, preferring instead to assess each case individually.
Banks have been less flexible, with Barclays and Royal Bank of Scotland among those with an upper age limit of 70 and Santander requiring repayment by either 65 (interest-only loans) or 75 (repayment loans).
The Halifax announcement offered encouragement to older borrowers in early May when it raised its upper age limit from 75 to 80, with effect from last Monday. The Nationwide’s move so soon after raises expectations that others will do the same over the coming weeks.
That would be especially welcome for people stuck on expensive loans and unable to remortgage. They include large numbers of borrowers on interest-only deals wanting to switch to normal capital repayment mortgages so they can pay them off.
“What this will do is assist mortgage prisoners by offering more choice and flexibility, although they will still need to meet affordability criteria, which will still prove difficult,” said Alison Mitchell, mortgage expert at Edinburgh IFA Robson Macintosh.
Homeowners in Scotland could particularly benefit, as most of the smaller building societies without upper age limits are based in England and Wales.
The Nationwide increase raises expectations of a shift in attitudes across the industry. But there’s less to it than meets the eye. For example, the offer is currently limited to existing customers and they will only be able to take out new mortgages up to the age of 80 if they can prove they’ll repay it by their 85th birthday. The maximum loan size is £150,000 and it must be no more than 60 per cent of the value of the property.
“The limit restriction will shut out certain clients in certain areas, so they have been clever in not opening themselves out to a large influx of applications and the associated risk,” said Mitchell.
“As a borrower’s pension is no doubt less than current income, meeting affordability will be in many cases be difficult.”
But lenders need to go further, according to Matt Sanders, head of money at Gocompare.com, who said the borrower’s age should be irrelevant provided they can show they can afford repayments.
“There are plenty of baby boomers with reasonably generous final salary pensions who can afford to carry some debt in their retirement and many more will be choosing to work for longer too, not only because they have to, but because they want to,” he said.
The extra flexibility will allow borrowers in their 40s and 50s to take mortgages over longer terms, reducing their monthly costs and making it easier to meet affordability requirements, he added.
There’s considerable potential for confusion over the way lenders treat pension income, however. Most will only accept a guaranteed pension income as proof of affordability, yet the 2015 launch of the so-called pension “freedoms” means a growing number of people are staying invested in retirement and taking their income on a more flexible basis.
In other words, if you want to borrow past a certain age you might need to buy an annuity and forget about taking advantage of the new pension rules.
Anyone thinking about lending into retirement should be aware of the pitfalls, not least the risk of being lumped with debt repayments but insufficient capital or income to clear them.